CREATING A TRADING PLAN PART 1

CREATING A TRADING PLAN PART 1

What is a trading plan?

A trading plan is a document that governs everything in a traders life. A trading plan by itself will not make a trader successful, but it will increase the odds in favor of the trader. It will force the trader to engage the market in a organized and methodical way. Most new traders do not have a trading plan and they end up trading by feeling, gut instinct or in a haphazard manner, in doing so will jeopardize the account. At the heart of a good trading plan is the money management rules that minimize the losses that will incur so that the trader can last longer in the game then those traders who do not have a trading plan.

With a trading plan, a trader can have a good idea on his performance and can make interventions if he feels that there is something wrong. There's an old Chinese saying “When you die, you need to know why you died”. With a trading plan you will know if your trading systems are not making money. Some traders don't have a clue that their systems are not performing and continue to make huge losses thinking it's a draw down and not that their systems are lousy.

This quote sums up why a trading plan is vital. “While a plan cannot predict the future, it can lay down how you react to the possible outcomes. This is why a plan is essential. It is a list of strategic responses to events beyond your control. You control the only thing you can control – yourself” Alpesh B. Patel.

Some people have told me that a trading plan is the same as a trading system, but in actual fact a system is a part, a small part, of a trading plan. A trading plan is a holistic approach to trading, a trading lifestyle that governors every aspect of a traders experience. While a trading system will just tell a trader when to enter and exit the markets. In the overall picture, a trading system makes up only about 20% of the whole trading plan. When I share with people about a trading plan, I tell them that a system must be a part of a trading plan, but a trading plan can have any system. In my case I have a few systems running in my trading plan.

A trading plan has several different parts or components. These parts can be interchanged with other parts from different traders. Let me give you an example, Let say you and I have our own trading plan and when I look at your trading plan I like your money management rules. I can actually take my money management rules and replace it with yours without changing the other parts of my trading plan and the trading plan should be able to work.

I have been asked this question, who needs a trading plan? In my humble opinion, everyone that trades / engages the market needs a trading plan. “If you fail to plan, you plan to fail”. Before trading I was running several businesses . Before starting a new business, I always made a business plan, this plan guides me in the business. A trading plan is the same thing, it will guide a trader so he does not get lost and become prey for the other traders.

A trading plan will make trading easier, it will stop you from “thinking” about where the market will go and all you have to do is to execute the plan. In trading all “thinking” should be done outside of the market, during the weekend or your off day from trading. “Thinking” should not be done when your “in” the market. When you are “in” the market, you should be just doing (following the trading plan), not thinking.

It will also make it easier for you to keep account your progress and it will let you know if you have gone off track and how to get back on and it will also keep you discipline, thus keeping your emotions in check so you would make hasty decisions.

I hope to go thru everything I know on how to make a trading plan so that new traders can start making one. To me a trading plan, a good trading plan, is the Grail in trading. When you look at the pros, you will realize that the outcome of the trade is not important, following the trading plan to the letter is the most important thing.