Having a winning trading plan is essential to being a successful trader, although it is important to note that a trading plan is not a guarantee of success. What it does do is prepare you, allow you to monitor your trading and help you modify your strategy. Traders need to develop trading plans and test them thoroughly before committing to any trades in the live market. This plan must be assessed regularly and adjusted when required. Every plan is unique and will need to be developed to suit the individual trader, considering their goals and personal trading styles. So, how do you build a winning trading plan?
- Set Goals – Work out your profit target. This will tell you whether it is worth taking a trade or not. Set weekly, monthly and annual profit goals and re-assess them on a regular basis. Generally, traders set profits goals of at least three times the risk.
- Set Risk Levels – This is the amount that you can risk on any one trade and over the course of a day. It is the amount that, when reached, tells you to stop. Typically, risk levels should be set between 1% and 5% of your portfolio, but the exact amount will depend on your risk tolerance and trading style.
- Set Exit Rules – Setting exit rules is just as important as setting buying signals. If your stop loss is reached, you need to get out. If you’ve made a loss on that trade, it’s OK because by limiting your losses, you will be able to trade another day and are more likely to make a profit in the long-term.
- Set Entry Rules – You must have signals set for when to trade. These signals should be complicated enough to be effective, but not too complicated for you to be able to ever implement. In fact, you should have a checklist that includes all signals for entering a trade. When you start out, you will probably find it takes you some time to go through the checklist, but with practice, this will be much quicker.
- Record All Your Trades – Make sure to keep records of all aspects of your trades and keep them detailed with all criteria of the trade listed. This will help you look back to see who trades failed or were successful and this will help you to tweak your trading plan wherever necessary.
- Write Everything Down – A trading plan cannot be successful if it is in your head. Every aspect of your trading plan should be written down clearly. Start by writing down your self-analysis as you work out your trading styles and your triggers. Continue on to writing down your goals, your risk levels, entry and exit rules, strategy for risk management, trade records and charts. Include any notes you make on past trades. All of these criteria and analyses, written down, will help you go back and modify your trading plan as necessary to ensure it is as successful for you as possible.