Developing a trading plan

What is a trading plan?

A trading plan is a structure, or a set of guidelines, to define your trading activity. It can be an extremely useful tool to help you focus on planning and executing your trading strategy.

There is no absolute blueprint for the perfect trading plan – every trader is unique, and different styles suit different people – but there are certain universally accepted elements to consider when building your own plan.

Your road map

You can think of a trading plan as a road map; a route to take you from where you are to where you want to be.

Metaphorically speaking, it is important to have a very clear and honest picture of both of these ‘places’ in mind.

Where are you now?

Where do you want to be?

Another way to look at a trading plan is like a business plan. You wouldn’t start a business without a business plan – why would you want to start trading without a trading plan?


General trading plan rules

While it is true there is no absolute blueprint to constructing the perfect trading plan, there are a few general rules that will be extremely useful in almost all cases.

1. Write it down. You should write down things like your reasons for trading and the key objectives that you hope to achieve. This will help you organise your thoughts, as well as giving your plan solidity.

2. Record your progress. Develop a clear and concise method of recording your trades. It is critical in planning a long-term strategy to be able to view your past and present trades, both from a learning perspective but also to keep track of which markets you are, and have been, exposed to.

3. Control your finances. Money management is a third crucial element of any trading plan. You need to have a plan for managing your investments, especially your exposure to risk.

You can use the trading diary within market insight to keep all your notes in one place. You can add notes and charts whenever you open, close or alter a position or order

Key trading plan questions

Here are a few important questions, and some hypothetical answers, to consider when setting up your trading plan:

What is your motivation for trading?

To make a sustainable living
To top up my retirement funds a little
To make some fast cash whenever I can
Purely to enjoy the challenge
To make as much money as possible

What is your attitude to risk?

I like taking chances
I like a balanced approach towards risk and reward
I like to play it safe

How much time can you give to trading?

It's my full-time job
Only my spare time, but I'm committed
This is just a hobby, for when the mood takes me

What is your level of knowledge?

I'm very familiar with financial markets and most trading methods
I know certain areas in depth, but others are unfamiliar to me
I'm fairly new to financial trading, but learning fast
I'm just getting started and only know the basics

In the next two sections we identify the benefits of having a trading plan, and we offer some tips on creating one for yourself.