How to Make a Trading Plan with a Trading Plan Example

When you trade stocks, you must have a plan. If you don’t have a plan, you may not win. This post will help you make a trading plan that contains rules telling you when to buy and sell. Before you trade, you must decide what you’re going to do. If you don’t figure it out, you could lose money and you won’t know why.

There are two types of traders. Those with a trading plan and those without.

The latter suffers from an inability to follow their strategy, while those with a trading plan have a way of doing things–a written map to follow on their road to profit.

Identify the type of trader you are

Your trading plan first depends on knowing the type of trader you are. There are many ways to trade, so it’s easier to start by finding out what works for you.

Take some time to journal with these questions to structure your trading plan.

  • Who are you?
  • What are you trying to accomplish?
  • What are your biggest fears are with trading?
  • What is your edge?

How Does the Market Work?

Knowing how markets work and how capital flows is an important step in learning how to trade and building a trading plan. In the TRI Level 1 program, TRI instructor Grimm and TRI’s founder Brian help you learn the capital markets and build your trading plan. One way to think of the market is to imagine it’s a swarm of smaller components, instead of one unit.

It’s useful to think of the market as a big swarm of bees. The bees all fly alone, yet the shape of the swarm keeps changing. With the right tools, you can track where the bees might swarm next, but very often it changes direction at random. 

Instead of being inside the emotional swarm, you must step back and see the big picture. You should form your strategy as the beekeeper, with a solid plan. One behavior of the beekeeper is keeping a trading journal and a trading log. 

Setup a trading Journal and Log

Your trading journal is a place to record everything you learned about the market and any trades you have made. It’s a to remember the important things about a trade, and a way to look back and analyze to keep improving.

The trading log is similar but tracks the details of individual trades. You would track the entry price, exit price, targets, and any other trade-specific details. Add your reasons for taking a trade, turn the log into a checklist, and use it to track notes and mistakes on individual trades. You can analyze your logs later to find flaws in your trading strategy so you can add contingencies to the plan that make it easier to follow.

Be purposeful about your choices and decide what’s most important to you. 

Your trading plan is more than a to-do list. It’s a series of questions to ask yourself about every trade you make. And most of them are questions about why you’re making the trade.

1. Why am I taking this trade?
2. When and why will I get out?
3. What will cause me to change that exit price?
4. What is my risk on this trade, and how will I manage it?
5. Will this trade satisfy my goal for the week/month/year?
6. Will this trade fit with my risk profile?
7. What is my edge in this trade, and is it worth the risk?
Your trading rules are the ground rules you use to assess whether you want to do a trade. By comparing your trade ideas to your trading rules, you can see if you should even think about taking the trade or not.

Your trading plan doesn’t have to be complicated. If you just have three or four simple rules, that’s fine. The important thing is that you evaluate each potential trade against them. At TRI, we recommend using 3 reasons to take a trade, and those 3 reasons make a single setup. You can have multiple setups in a single plan, and this is where trading becomes unique for everyone.

Paper Trade While Following the Process

To practice, start paper trading, logging, and journaling as you go. This allows you to make mistakes and practice without losing money. After doing a handful of paper trades (Tri recommends 20 - 100 trades), then start with 1/10th of 5% of your account.

As you see how your trading plan works, start adjusting and adding contingencies to make sure you’re sticking to the plan. Only you can make yourself stick to your plan, so you need discipline and patience.

To help with this discipline, many traders put unique and personal checklists into their trading plan. Some only trade with shoes on, others only trade after doing a strict checklist. Whichever method works for you is the one you should use.

Narrow down your strategy

A trading plan can improve discipline by making trading decisions more automatic, reducing emotional involvement. It’s harder to create a trading plan than it is to FOMO into trades without a plan. Following your emotions is easier because it’s in your nature to react to the market with emotion. 

That’s how 90% of participants lose money, so you must do the opposite.

Get started with learning how to make a trading plan in the TRI level 1 education program, or by jumping into the TRI membership with a free 30-day trial. In the Library, you’ll find setups and trading plan examples to download, along with a goldmine of trading resources.

Comments (0)