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Trading Plan

A trading plan is a set of rules that defines a trader's behavior, including financial goals, money management, risk management, and criteria for opening and closing positions. Without a trading plan, a trader has planned to fail. A trading plan helps traders make decisions with discipline rather than being controlled by hope. The plan should include entry and exit prices and conditions before a trade is taken. The plan is most important early in a trade when risk is highest to determine when to exit a losing trade. Sticking to the plan with discipline is key to managing losses as part of trading.

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Girish Nair
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176 views2 pages

Trading Plan

A trading plan is a set of rules that defines a trader's behavior, including financial goals, money management, risk management, and criteria for opening and closing positions. Without a trading plan, a trader has planned to fail. A trading plan helps traders make decisions with discipline rather than being controlled by hope. The plan should include entry and exit prices and conditions before a trade is taken. The plan is most important early in a trade when risk is highest to determine when to exit a losing trade. Sticking to the plan with discipline is key to managing losses as part of trading.

Uploaded by

Girish Nair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
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What is a Trading Plan?

A trading plan is a set of rules and guidelines that shape and define your trading
behavior, including but not limited to: financial goals, money management rules,
risk management techniques and criteria for opening and closing positions.

Most of us in our everyday life start out with a plan of sorts, which helps in
becoming successful in our accomplishments are personal priorities. In forex and
CFD trading often our personal decisions translate into either a profit or a loss,
and knowing your trading direction could be that fine line between success and
failure. If you do not have a trading plan, then you have planned to fail.

When most traders think of making profits in trading and investing, they usually
focus on methods of market timing or what to do based on certain news releases.

While market timing is extremely important for the purpose of minimizing risk
exposure while maximizing profit potential, it will not help the trader or investor
that goes about taking trades without a well thought-out plan.

One of the most common problems traders face is that of HOPE.

Now, I am not saying that there is a problem with having hope. Who does not 'hope'
that their trade will come out profitable?

However, what often occurs is that a trade does not start off as expected, and the
trader is then put in a position where a decision needs to be made, only to be
completely controlled by HOPE. All reasoning goes out the window once the trade
starts moving against the position, and the 'plan-less' trader is then holding onto
the position due to HOPE.

Without a proper trading plan BEFORE the trade is executed, discipline is often the
first to go.

When the decision was made to take a trade, there had to be a good reason for it.
The trader saw something in the charts, or perhaps in the news (for those that dare
to use such unreliable information) that suggested taking a position would likely
result in a good profit. This would also be the time to decide what is to be
expected from the trade and what to do if the market does not provide what is
expected.

All this MUST be done BEFORE the trade is executed!

The disciplined trader would have all this written down. The items to list would be
the ENTRY price zone, the price objective if there is one (not all trades need an
objective if there is a plan on how to trail the trade with a stop-loss order), and
what conditions would signal an immediate exit from the trade, such as price
breaking below a certain price level.

Where the plan really shines is during the early stages of the trade, when the
market has yet to move deep enough into profit territory to warrant a tightening of
the stop-loss.

During the initial stages of a trade, the risk of loss is at its highest. The
trader 'with a trading plan' knows this and has already determined at what price
point the trade would be considered operating outside of initial expectation. The
trader would prudently place a stop-loss order at that level and under no
circumstances ever remove it other than to move it further into the direction of
profit.

Without the trading plan and the discipline to stick to it, the trader can find the
trade moving into the exit price zone only to start 'hoping' that it is going to be
brief and that the market will soon turn around and all will be right with the
world.

Most times, this does not happen! The trade continues deeper and deeper into losing
territory, and the trader simply cannot accept such a loss so continues to 'hope'
that it cannot continue for long and holds on rather than exits. Eventually the
pain becomes too much and the trade is finally exited (unless the account is wiped
out, which makes the exit automatic), only to then see the market finally turn
around. This is very devastating to the trader's psyche!

If you are going to trade, you must accept manageable losses as part of the
process. You must be willing to write down your trading plan with your exit
strategy clearly laid out. You must be willing to follow that plan that you wrote
'with a clear head' to a tee, with no exceptions.

One of the best lessons I have ever learned in my 30 years of trading came from
writing and following (or not) my trading plans. I learned where the weaknesses
were in my plans and had something I could look at and improve upon. It helped me
build stronger 'will' and determination, pumping up my discipline muscles along the
way.

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