Are you trading based on thorough research and planning … or not so much?
Sometimes, trading can feel like you’re trying to get around without a map in uncharted wilderness. As a trader, you might not feel like you have a sense of direction, and there are all sorts of potential pitfalls and dangers that you could encounter. How can you shake those feelings and find your way? Simple: make a trading plan, and stick to it. It’s easier than you probably think. A trading plan is a self-made map that you make to plan out a trade before you execute.
It doesn’t take much time to make a trading plan, but it can offer some serious long-term benefits. That’s why so many StocksToTrade members and I work on our trading plans together at the end of each trading day — because we want to be ready for whatever action comes our way in the morning. Here, I’ll cover what trading plans are and how they can help your trading career, then share how you can create your own trading plan in eight simple steps.
What Is a Trading Plan?
A trading plan is an outline of any given trade. It defines why you’re making the trade, and when and how it will be executed. Your trading plan takes into account your own personal trading style, risk tolerance level, and expectations for any given trade.
You can even customize it with anything from watchlist picks (Tim Sykes has a new weekly list) to chart setup mandates. Just be sure you don’t make things too complicated or you’ll struggle to follow your plan. Make your own rules — but make them realistic.
Why? Because when you follow your trading plan, you’ll be better able to keep a level head while trading, thus potentially minimizing mistakes and losses. That’s always a good thing.
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Do You Need a Trading Plan?
Listen, trading plans aren’t sexy. For that reason, many traders are quick to dismiss them as unnecessary. Instead, they choose to focus on the more exciting aspects of a trade, like hot stocks, chart spikes, news, and catalysts. But this is a big mistake! While those factors can certainly help in choosing the best stocks to trade, for the best results, they must be combined with a plan to help deliver the most reliable results.
So, do you really need a trading plan? Strictly speaking, it’s not necessary to have a trading plan to make a trade … but if you want to follow the trajectory of successful traders before you, then yes, a trading plan is highly suggested.
So let’s look at how you do it …
Planning: The Key to Long-Term Trading Success
A trading plan allows you to have a clear-cut plan of attack for entering and exiting a trade. It makes all the difference between a calculated trade and the “hold and hope” mentality that causes so many traders to lose money. Without a trading plan, you’re pretty much gambling. Sure, you might win here and there, but your progress won’t be as reliable as it could be with plans in place. Many traders who don’t follow trading plans end up watching their losses exceed their gains, and they ultimately give up on day trading … Don’t become a cautionary tale: Make a trading plan every time!
Tips for Creating a Trading Plan
Now that you’re sold on the benefits of making a trading plan, how do you actually do it?
Here are 8 steps to help you knock out a killer trading plan …
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1. Set goals. What do you hope to gain from this trade? Set realistic goals for profits. This is something that becomes easier with a little experience. For instance, as traders become more established, they may determine that a trade isn’t worthwhile unless the potential profit is at least double or triple the risk. 2. Focus on risk. What’s your personal risk tolerance level? Only you can answer that. Follow this rule: BEFORE you enter a trade, consider how much of your portfolio you’re willing to risk on it. While many stick to the 2% rule when trading, if you have a small account, you may decide to do otherwise. Don’t risk too much capital! There’s nothing wrong with starting small. It’s the smartest choice. 3. Be sure to do your research. Before you enter any trade, be sure to do your research. Seek out the big gainers. Evaluate the stock charts and research potential catalysts that could affect the value of a stock. Be diligent in doing this, as it can help you determine if the stock might perform how you’d like. You can never know 100%, but you want to be able to say you did all you could to make this determination. 4. Plan your entry. Make a specific plan about when you will enter the trade. Decide what buy signals will be your own personal green light to enter a trade, and only enter once they are met. You can set specific criteria with StocksToTrade to determine when stocks meet your buying standards.
5. Plan your exit. It’s just as important to consider when you plan to get out of a trade. First, consider what you’ll do if a trade starts going sour. What is your stop loss–when will you pull out if things aren’t going your way? Make a resolution to actually get out at this point, and don’t take it personally.
6. Plan your profit target. Be willing to get out once your profit target is met. Don’t get cocky! 7. Write it down. Literally. Don’t just keep it in your mind. There’s a sense of accountability that comes with physically writing down a trading plan and keeping it in a prominent place in your work area. When your trading plan is actually staring you down while you work, it will be more likely to help keep you accountable. 8. Review the trade afterward. Once the trade is done, take some time to consider how things went. Keep notes on your trades in a trading journal. This can help you gain major insight into what went right or wrong – which can help your future plans. Every trader has a weakness, whether it’s holding onto losers too long, getting too emotional when trading, running an unbalanced portfolio, not timing entries or exits properly, etc. Your ‘post-game review’ will help you learn where you need to be more diligent.
Long-Term Benefits of Trading Plans
Yes, trading plans are that important — they can truly change your relationship with trading.
They can transform your mentality from chasing the brightest and shiniest stocks to being a calculated hunter of profits. Which would you rather do? By creating trading plans, you’re likely to see your trading confidence soar. Once you experience the rewards that careful planning can bring to your trading, you’ll be hooked.
When you’re ready to dive into even more research, start incorporating things like watchlists and trend analysis. Use a platform like StocksToTrade help you. With STT, traders no longer have to visit 10–15 websites to keep up with all the most in-play stocks. You charting, news feeds, quotes, watch lists and more, all within an easy-to-use piece of software.
Ultimately, there are many factors beyond your control in trading. But it’s possible to control when to pull out of a trade, thus minimizing your losses. This makes learning how to create a trading plan a vital part of your trading process.
No excuses! Made a trading plan every time.
Do you make trading plans? Do you have a question about trading plans? Let me know. Share your comments.
