A trading plan is a must for every serious trader – here is how to do it

A trading plan is a must for every serious trader – here is how to do it

A trading plan, together with a trading routine and a journal, build the foundation of my trading.

We all have heard the saying “Plan your trade and trade your plan” and the importance of this statement cannot be highlighted enough.

The benefits of having a trading plan are manifold and they range from reducing the stress during your trading day, to missing fewer trades, to becoming more aware of your trading behavior which then allows you to make very targeted progress and approach trading seriously.

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?

Basically, a trading plan is like a road map for your trading day/week. Over the weekend, a trader analyzes the markets that he/she considers trading and creates potential trade ideas.

In the trading plan, traders capture important observations and map out possible trades. Every trade should start as an if-then scenario where conditions are established that would trigger a trade entry.

For example, are you a breakout trader and need to wait until a specific level is broken a certain way? This must be in your trading plan.

Are you a trend-trader and wait for momentum? How much momentum do you require and what must happen before a trade gets triggered? Put it in the trading plan!

You get the idea…

 

Optimize your trading time

I am the first to admit that creating 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. Without a trading plan, I’d end up chasing setups, jumping around the markets, and not knowing what to look for. This usually ends with missing trades and being way too late.

This might sound contradictory, but a trading plan helps me reduce the time I need to spend in front of charts during the week. This is true because I know exactly what I am waiting for. I just need to set my price alerts and occasionally check in with the charts if the conditions are met, but that’s it. You’ll never see me looking at charts for more than 2 or 3 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 difference in your trading.

 

 “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln

 

Stress-free trading

Another main benefit 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 – especially if you do it during the weekend. This approach 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

Emotional

 

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 FIRST. Not the other way around!

In trading, the 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 they allow 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 also take more of the same trades which also enables you to perform a better performance review, instead of looking at trading results that are all over the place.

Finally, 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.

For this, I recommend reading my article: The secret ingredient to profitable trading

Consistency

 

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

 

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.

 

 

Comments ( 4 )

  • Alan Webb

    Excellent article (as always Rolf ) and best thing I have done since trading seriously was to join the Tradeciety family – Alan

    Ps: love the Monday webinars !!!

  • Laurie

    Great stuff, I can’t hear it too often!

  • Mori

    Thank you a lot for your tips and lessons Mr.Rolf
    I always follow your tips and make them like headlight in may trades procedure
    Best wishes

  • Vijay khatri

    Superb….I have no words… because..I m new…loss a lot….. it’s okay but now…here n after…good know’s

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