Build a Proper Trading Plan

Recently, a novice trader presented his trading plan and asked for some assistance with it. We took note of the fact that it was not comprehensive enough and needed alterations. However firstly, we recommend having two trading plans:

• Your Business Trading Plan
• The Day-to-Day Trading Plan, on which what we will be focusing on.

Do you know what makes a plan effective? In the following paragraphs, we will go over all the 13 elements of the trading current plan – outlining each and indicating what we would change and why it needs to be altered:

1. Introduction

The introduction was quite good but had two aspects that needed some changes:

• The opening statement, “This plan is aimed at preventing traders from emotion-based trading” is only helpful for that day but does not delve into the things that cause it. What should have been included are proper pre-trading training, building your sub-conscious skill set as well as removing limiting beliefs.
• It also stated that, “The plan can be adjusted and traders can modify the rules” without placing a time factor.

 2. Price Action Signals to Trade

We thought this section should have come later in the plan when the price action context has been fully understood.

Ideally, we would put the pre-trading preparation (physically, mentally, market analysis…) here.

3. Rating a Trade

This should have come after the price action context, starting with a top-down analysis. Their 13-point rating also rules out intra-day trading completely. The trading plan should be flexible enough to accommodate it alongside ‘Trading with the Trend’.

4 and 5. Time Frames and Pairs/ Instruments to Trade

This is also not in the correct position since we can only know the tactics to use after knowing the context. It also presumes the time frame, a more important part than the instruments being traded, which is completely the opposite.

In addition, the pairs/time frames we are trading should have been allocated a section.

6, 7 and 8. Risk-Reward Ratio/ Number of Positions/ Position Sizing

The first one is quite irrelevant without understanding “the Risk of Ruin.” To find this, you will need to use “Risk of Ruin Calculator.”

The number of positions should never be limited in any way as long as the risk of ruin is kept at zero. However, we may have a fixed percentage of risk per trade which can be spread over the possible trade setups. Position sizing, on the other hand, can be addressed under one section we would call “Risk Management”.

9, 10 and 13. Stop Loss & Take Profit Rules/ Rules for Entry/ Losing Trades

They have to be mentioned in the strategy.

11 and 12. News Events/ Documentation or Journal

The news event should have come under the ‘pre-trading preparation’ as part of market analysis. As for the documentation, there was no reason to review trades or do weekly trading analysis. We would recommend monthly, quarterly or yearly reviews.