A trading plan, together with a thought out trading routine is what I attribute most of my trading profitability to. The benefits of having a trading plan are manifold and they range from creating a stress-free trading environment, missing fewer trades, to becoming more aware of your trading behavior which then allows you to make very targeted progress.
If you are not having a trading plan, or if you are looking for ways to leverage the benefits of utilizing a trading plan, this article will show you exactly how to take your trading to the next level.
Intro: what is a trading plan?
We will talk about how to create a trading plan in detail at the end of this article but to use the information and tips in this article effectively, we will briefly explore what a trading plan is first.
Basically, a trading plan is like a road map for your trading day/week. Over the weekend, a trader analyzes the markets that he considers trading and creates potential trade ideas. In his trading plan, he captures important observations and maps out possible trades. He also creates so-called “if-then” scenarios that will help him take much better trades – more on that later.
Optimize your trading time
I am the first to admit that writing a trading plan takes time; I personally spend 3-4+ hours every Sunday on writing my own trading plans. However, I would never start my trading week without a trading plan next to me. And, secondly, it helps me reduce the time I need to spend in front of charts during the week and you’ll never see me looking at charts for more than 1 or 2 hours during the week.
Most traders do it the exact opposite way: they don’t look at charts during the weekend and then waste too much time staring at charts during the week in an unorganized way. Especially if you are not a fulltime trader yet and you have other responsibilities besides trading, reducing your screen time can make a big different in your trading.
Further reading: My step by step trading routine
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln
Another main benefits of having a trading plan is that it will take away most of the stress and eliminate many of the emotional problems traders deal with.
A trading plan forces you to analyze your charts in detail and without the pressure of live moving markets, it allows traders to take a more objective look at price movements. At the same time, after you have created a trading plan, you will know exactly what you have to do, when you have to do it and what to expect from your markets. Trading then becomes a waiting game where you let price come to you and don’t have to hunt trades and randomly flip through timeframes.
This is how a trading plan helps you overcome the most common problems
Consistency for more success
Every trader always talks about achieving consistency and being consistently profitable but nobody knows how to get there, or they focus on the wrong things. Consistent results can only be achieved by following a consistent routine and eliminating noise. In trading, noise comes from taking trades that don’t match your rules, missing trades and then chasing price, inconsistent risk management, changing indicators or methods, and the list goes on.
A trading plan and a routine force you to objectively look at your trading and it allows you to create a calmer trading environment. After you have pre-planned your trades with your trading plan, it’s harder to break trading rules because you have to convince yourself that it’s the right thing to do; you take more of the same trades which also enables you to perform a better performance review; you become more aware of how you really trade once you spend more time planning your trades; and you gain more confidence by following a routine and practicing discipline.
An underused trading tool: price alerts
I am trying to get this message across for a very long time and I am a big believer in using price alerts to minimize screen time and also to reduce the amount of missed trades that come from following a poor trading routine.
When I create my trading plans, I identify key price levels and I place my price alerts around those price areas that could trigger a trade. When a trade alert goes off, I can compare with my trading plan what I need to do and whether the price setup is offering a trade or not.
Don’t confuse price alerts with pending orders. A price alert does not mean that I automatically take a trade, but it helps me stay on top of things and I am not missing price movements while not having to watch charts.
Stay open for changes
A common mistake many traders make when creating a trading plan is that they create a very strong bias towards one direction. When you write a trading plan, always come up with scenarios for long AND short trade ideas. A trader who only focuses on one side of the market is more likely to miss clues that would cancel his trade or he ends up forcing trades because he is too fixed on his one idea.
Everyone has a plan ’till they get punched in the mouth.
– Mike Tyson
Our template for creating a trading plan
You can get our free trading plan template, and other trading tools, by signing up here. However, you can just as well do it yourself and create one in Word, Evernote or Excel. Here are the most important things to keep track of in your trading plan:
Top down: I always start my weekend trading plan on the weekly and daily timeframe. I just look for the general market direction and mark the most important key price levels here.
Update and keep charts relevant: It’s important to keep your levels and charting tools relevant. Never have more on your charts than you really need.
Short, precise and expressive: Remember, the goal of a trading plan is it to help you make better and faster decisions. When you spend too much time pondering over your trading plan to figure out what you were trying to say, you missed the point.
If-then scenarios: This is the heart of each trading plan. In your if-then scenarios, you come up with potential trade ideas and you write down what has to happen before you enter a trade. Here I mainly write down where price has to go, what my indicators have to show, if I require small or larger momentum etc.
This is like a checklist that you go through before you enter a trade.
Key levels: Those are the levels I identify on the weekly and daily timeframe and where I have my price alerts at.
Outcome: After the end of the week, I add the outcome of the trades to each trading plan. This step helps me to once again check how I managed my week and executed my trades. It’s a simple and very effective way to audit your trading and find unnecessary mistakes.
There is a reason why airplanes are the safest mode of transportation and why hospitals were able to significantly reduce the mortality rate and it’s because they work with checklists and plans. If you take trading seriously, you have to start using a trading plan to eliminate noise and to create a professional trading environment. It’s the easiest and most effective way to instantly improve your trading approach and results.
Planning without action is futile, action without planning is fatal.