By definition, a trading plan is a method to systematize your short- and long-term trading strategy and is based on your time horizon, risk tolerance, and, of course, your unique trading style. A viable, written-down plan is crucial for your future success, as well as for failure analysis. So, your first step to trading is to figure out what type of trading plan you want to have.
Types of trading plans
This material aims to help you understand the basics and not scare you away from trading with overcomplicated schemes. So, having in mind that there are dozens of subcategories of trading plans, we’ll try to break it down for you into two primary sections: simple and tactical.
Simple trading plans
If you prefer automatic investment at regular intervals, you have fewer variables to keep in mind, but there still are some mandatory clauses to include in your outline, such as:
- Entry and exit rules. You may prefer to invest only when the price falls by a specified percentage or when a position shows steady growth over a period of time. Don’t forget to specify exit rules for both success and failure scenarios. Even though it might be hard to sell when the price is rising – you should exit the position upon reaching a profit goal. The stop-loss strategy speaks for itself. If you’ve set a loss limit and it’s passed – the show is over.
- Investment size. You should determine your standard investment sum per month and stick to it unless there are signs of strengthening or weakening of a particular position. In those cases, you should reevaluate your investment size to maximize profits.
If you build your initial plan on these basics – it’s going to be consistent enough to start. You’ll be able to add more details when you have more experience and your knowledge of the market improves.
Tactical trading plans
If you’re an active day-trader, a simple plan won’t work well enough for you for several reasons. One of them is that for a day trader, the start of trading activity is a decision that should be based on many parameters. If volatility is not high enough, you may not have enough opportunities for trading, and therefore – it’s wiser not to start even if all the other criteria are met.
You’ll also want to determine a set of parameters to enter and exit each position. Seasoned traders advise starting with the time-proven technical indicators, such as RSI, moving averages, and the MACD. In time, you might see your own patterns and signs allowing you to predict the market movement and improve your strategy. And, of course, you can determine the precise price levels for buying or selling, which is simpler but still quite effective.
Another thing to describe in your plan is position size. Trusting your gut might look good in movies, but it is definitely a wrong choice when your money is in play. All decisions should be based on solid methodology and fully described in your strategy. Moreover, position size shouldn’t be uniform for all your trades because adjusting it for each trade will improve your long-term performance. If you’re interested in more details and pro tips on creating your own trading plan – follow the link and see how you can make it solid!
What’s the purpose of a trading plan?
Regardless of the plan’s type, its purpose is always to help you understand your goals and the ways to reach them. Every action and outcome should be analyzed to use the results for improving your plan later. Some say that you should carve your trading plan in stone or cast it in bronze, but in reality – only you can decide when to alter or discard it if it doesn’t work. Just don’t give up on it after a single rough patch. Wait until you have the statistical data to make an informed decision.