Developing, testing and implementing a trading plan

What should I put in my trading plan?

The main things you might want to include in a trading plan include:

• Your motivation for trading and your trading goals: Why do you want to become a trader and what are you hoping to achieve through trading?
• How much time you want to spend trading: How much time do you want to commit to trading and when will you make your trades? Is it something you need to fit into your free time? Are you going to day trade or will you trade assets that will mature over longer periods of time? How much time are you going to attribute to learning more about trading or analysing the markets?
• Your trading strategy: What type of trader are you planning to be? The four main types you could be include:

1. a position trader: holding positions for longer periods
2. a swing trader: taking advantage of medium-term market moves
3. a day trader: opening and closing several small trades in the same day without holding positions overnight
4. a scalper: placing numerous trades per day for just a few seconds or minutes to make small profits that add up

• Your risk appetite: How much risk are you willing and/or able to take? This applies to individual trades and your strategy as a whole. Remember, you can manage your risk with stops and limits.
• How much capital you want to trade with: It might sound obvious, but it's important that you never risk more capital than you can afford to lose. Trading, by its nature, involves risk, and you could end up losing any (or even all) capital you allocate to trading. Ensure that you can afford the maximum potential loss on every trade you make. If you don't have enough trading capital to start trading, rather practise trading in a demo account until you do.
• Which markets you plan to trade: Every asset class and market is different, and your trading plan needs to be adapted accordingly. For example, a forex trading plan will be different to a stock trading plan. Decide upfront which markets you want to trade and learn as much about them as you can, including understanding the volatility of the market, how much you stand to lose or gain per point of movement in the price and other important basic information, such as market trading hours.
• How you will manage record keeping: We suggest keeping a trading diary to help you assess how effective your trading plan is as you're implementing it. This can include all the technical details of trades, such as your entry and exit points, but also why you made the decisions you did, whether you stuck to your plan, and what your emotions were at the time.

Remember, one of the best ways to test your trading plan is to use it to trade in your demo trading account. Ideally, you should stick to your plan for a minimum of 10 trades, although more is better.

Setting trading goals

Trading goals should be SMART -- specific, measurable, attainable, relevant and time-bound. For example, you might want to increase the value of your trading portfolio by 10% over the next six months.

However, not every goal has to be based on monetary results. For example, your first goal might be to follow your trading plan for 10 trades before making any adjustments to it.

Another goal might be to only make trades that meet the requirements you've set out in your trading plan. Traders might set monetary goals and then push too hard to achieve them, even when the market does not present suitable trades. It's easy to be tempted to make impulsive trades that don't quite fit in with your strategy. One of your goals should be to be disciplined in sticking to your plan.

Other goals you might want to consider include targets related to your risk/reward ratio and rate of return. The risk/reward ratio helps you manage your risk of losing money on trades.

Your rate of return (RoR) is the net gain or loss of your trades over a specified time period, expressed as a percentage of your initial capital outlay. To calculate your rate of return for an investment, subtract the starting value of the investment from its final value (remember to include dividends, interest and fees). Then, divide this amount by the starting value of the investment, and multiply that figure by 100. This will give you your rate of return, expressed as a percentage. Find out more about rate of return here.