How to Create a Trading Plan

There are no guarantees in life, but when it comes to trading, a carefully crafted trading plan will serve as an essential investment for your trading journey.

What Is a Trading Plan?

A trading plan is like a map that can help you navigate the trading process from start to finish. It can help you choose the best market for you, determine entry and exit points, and control your risk. A well-designed plan can keep you accountable and focused, setting you on the path to success.

Can I Download One?

You can, but it most likely won’t be the best fit for your specific trading experience. Each plan needs to be unique and personally tailored to the trader if it is to guide your decisions effectively. If you’re just getting started in trading, you may want to use another trader’s plan as a guide to making your own. Please keep in mind that each person has a different amount of money to invest, as well as a distinct risk capacity and risk tolerance.

Do Some Pre-Planning

Would you like to know how to create a trading plan to jump-start your portfolio? First, you need to pre-plan before you put your final plan down on paper. Start by asking yourself a list of questions.

Why do I want to trade?
How much time do I want to dedicate to trading?
What do I hope to accomplish?
How much money can I afford to commit?
What is my risk comfort level?
What rules do I have to help me manage risk?
Do I have any markets and strategies in mind?
How will I maintain records of my trading activities?

Though they may sound similar, your plan and your strategy are not the same things. Think of your trading plan as a general guide to your decision-making, while your strategy will be more specific.

Trading Plan Benefits

You most likely wouldn’t plan a road trip without checking a map for directions. You could make it work if you were looking for a sense of adventure, but you could also end up stuck in a traffic jam with miles of road construction.

A solid trading plan can help keep you out of a trading jam. It could help you avoid spontaneous decisions based on emotion rather than logic. Your plan should tell you in advance when you should go all in, hold steady, or cut your losses.

With a trading plan in hand, you will have already done your homework. That means you can make informed decisions and move quickly.

By relying on your plan, you’ll add to your trading expertise. Over time, you’ll see why some trades work well, and others fail. When you review your records as a whole, you will be able to discover where you’ve succeeded, where you’ve made mistakes, and where your trading skills might grow stronger.

Crafting Your Trading Plan

You will want to give yourself plenty of time and space to work out your trading plan. Make sure you’re well-rested and able to focus. If you’re stressed or distracted, you won’t be able to do your best work.

When you sit down to pull your trading plan together, you should first answer the questions above. Then, move on to the next steps listed below.

Ready? Here’s what you need to do:

Write It Down

Whether you use your computer or old-school pen and paper, you will need to put your trading plan down in writing. Committing it to writing makes the plan official. You’ll be more likely to take the plan seriously and stick with it.

Establish Your "Why"

You’ve already thought about your motivation for trading. Maybe you enjoy the excitement. You want to learn by doing. You’re hoping to make some money and create a nest egg for the future. You’re tired of the 9-to-5 life and would like to work for yourself by trading. Whatever your why, put it in your trading plan. Write it down.

Set a Schedule

How much time will you be able to devote to trading? Is your trading time first thing in the morning, in the evening, or during your lunch break at work?

Don’t forget to allow time to learn what you need to know, evaluate the market, and practice your skills by paper trading.

Keep in mind that you’ll need extra time if you plan to make multiple trades each day. If you want to play the long game, allowing your assets to mature, you won’t need to devote as much time on a daily basis.

State Your Goals

Your motivation is your trading "why." Your goals are your trading "what" what you want to accomplish by getting involved in trading.

Everyone’s trading goals are different, but they should have certain factors in common.

Goals need to be:

Reachable You won’t become a multi-billionaire in a week. Sure, your goals should have an aspirational nature, but they should also be achievable within reason.
Applicable Buying a private island is a goal, but it doesn’t apply to trading. Stick with your trading goals in your plan.
Measurable Get rich is a goal that is subjective but not measurable. Grow your portfolio by 20″ is measurable, and you’ll know when you hit that goal.
Timed You dont need a stopwatch. Trading isn’t a sprint. Your goals need to have a time-frame attached. Six months, a year, 2 years - the length of time is up to you.
Precise Grow your portfolio. That’s a good goal, but it’s not detailed. Grow your portfolio by a certain percentage in a certain length of time. That’s the sort of precision your trading plan needs.

Set Your Style

When choosing what kind of trader you will be, you need to factor in the time you plan to set aside to devote to trading, your comfort level with risk, and your personal temperament.

Some different trading styles include:

Position trading: This involves holding positions steady over a period of time, perhaps even years, relying on the prospect of profitability.
Swing trading: This is the middle-ground, holding positions for a few days or a few weeks.
Day trading: This can reduce some risk and cost since you wont hold overnight. Instead, you will open and close a variety of trades during one day’s time.
Scalping: This can be fast and furious, with multiple trades in minutes or even seconds, with the expectation of a number of small gains that add up.

Decide How You Want to Balance Risk and Reward

Risk can be both invigorating and scary. Be sure to put your risk tolerance down in writing in your trading plan. Risk tolerance is not a choice you want to make in the heat of the moment or with emotions running high.

Determine the risk/reward ratio that’s right for you. Many traders rely on a minimum ratio of 1:3, which means your potential profit will be at least twice the possible loss. To determine the ratio of risk to reward, examine the amount you’re putting up in comparison to the possible gain. If you risk $200 with a chance to make $1,000, you’re looking at a risk-reward ratio of 1:5.

Be sure to look at your risk-and-reward balance from two angles: in terms of each separate trade as well as across your overall trading strategy. Know that even if your trades lose more often than they win, you can still come out ahead, depending on your risk-reward ratio.

Establish the Amount of Money You Can Commit to Trading

If you live by the adage, Go big or go home, you might have a high-risk tolerance, but that doesn’t necessarily mean you have a high-risk capacity. What’s the difference?

Risk tolerance is the amount you are comfortable subjecting to possible loss. Risk capacity is the amount you can comfortably lose. Don’t risk more money than you can afford. Your goal should be to turn a profit, not to lose (or even come close to losing) your shirt.

While developing your trading plan, assume the worst-case scenario: the maximum loss on every trade.

If you arent quite at a stage in your life at which you have enough money to start trading, you can still play the game. Practice paper trading without actual cash so you can build your skills. Learn everything you can without true risk until you have the capital to get yourself started.

Give Yourself a Pre-Test

Dont worry; you won’t be graded. A pretest is your chance to figure out what you know and what you need to study a bit more.

Trading plans differ depending upon which market interests you. If you dont know stocks from forex, you won’t be able to craft an effective trading plan, and youll set yourself up for a trading disaster.

Everyone has a different level of knowledge about markets and asset classes. If you’re a beginner, you have nowhere to go but up. Decide what you want to trade, then do a deep dive. Learn everything you possibly can.

Related: Best Stock Research Tools

If your initial choice is too volatile for your liking, comes with too much risk as prices move, or doesnt fit your self-established training schedule, you can pick another market. By doing all of your research online and becoming knowledgeable, the higher your likelihood of trading success.

Set Some Limits

You will want to limit the markets in which you choose to trade, particularly if you are a beginning trader. Every market has distinctive characteristics. For your best chance of success, be sure to get to know your chosen market intimately before branching out. Learn all your markets quirks and peculiarities. Some traders get so deep into detail that they examine certain time frames in a market.

Know When to Get In and When to Get Out

You will need to establish entry and exit rules that fit your individual comfort level. Be more specific than Buy low, sell high. Think about stop losses, profit margins, and any other targets that are important to you. Strike a balance so your rules will be detailed enough to be useful without being so complicated that you cant make a prompt decision.

If you stick with your rules and work within your fund's limits, youll learn to accept losses and learn from them while keeping your eye on the long-term results. Entry and exit rules can help keep emotions at bay.

Start Detailed Record-Keeping Now

If you want your trading plan to be as successful as possible, be sure to keep a detailed journal of your trading history.

You can use a wire-bound notebook or a text file on your computer. Choose whatever format you’re most comfortable with, so you’re not tempted to skip this important step. Start now, so you can get used to journaling to the point that it becomes a regular part of your trading routine.

The technical details of each trade are critical, but they dont tell the whole story. You should also keep track of the reasons behind your trade decision and even your feelings about the trade.

Did you follow your trading plan? If not, why not? How did the trade work out for you? The more specific you can be, the more helpful your journal will be as your trading grows.

Do a Self-Check

As you build your training journal, you should review it regularly. It will help you see patterns in your trades. It can help you discover where and how youve routinely been successful and where you can use some improvement.

If you arent risking more than you can afford, dont let the losses throw you. No one wins the trading game all the time. In the long-term, a well-crafted and well-executed trading plan should help you achieve more wins than losses.

Bottom Line

Theres no rule that you have to have a trading plan to start trading, but without one, youre as likely to win the lottery as succeed in trading.

You need to put a significant amount of time and work into your trading plan. Theres a lot to learn and a lot to think about before you approach the starting line. The homework will be worth it. With a solid trading plan, youll do the work upfront, so your actual trading will be easier and more efficient.

While you can certainly find examples of trading plans online, the most effective trading plans are specific and unique to each trader. Your personality, comfort level, emotions, and goals should all be part of your trading plan. Adhering to someone elses trading plan wont pay off for you.

Once you have a solid trading plan in place, be sure to follow it. You shouldnt change your trading plan on a whim.

That said, as you gain experience and review your trading journal, allow room for adjustment. If you find some elements repeatedly ineffective, you should amend your trading plan. The plans purpose is not to stand as an immutable object, but to serve your success.

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