Never underestimate the power of a trading plan.
Trading in today’s markets can feel like trying to navigate through the wilderness. How can you get your bearings and find your way?
Simple: Make a plan and stick to it!
A trading plan can be your map. It helps you plan a trade before you execute. It doesn’t take a ton of time to make one, and there are a lot of potential long-term benefits.
So let’s get into what a trading plan is and how it can help you become a smarter trader!
Table of Contents
- 1 What Is a Trading Plan?
- 2 Do You Need a Trading Plan?
- 3 Planning: The Key to Long-term Trading Success
- 4 Trading Plan Essentials
- 5 6 Tips for Creating a Useful Trading Plan
- 6 Trading Plan Example
- 7 Trading Plan and Trading System: What’s the Difference?
- 8 How to Combine Your Goals With Your Trading Style
- 9 Long-Term Benefits of Trading Plans
- 10 Frequently Asked Questions About Trading Plans
- 11 What’s Next?
- 12 Conclusion
- 13 One Platform. One System. Every Tool
What Is a Trading Plan?
It’s your outline of a given trade. It defines why you’re making the trade and how you’ll execute it.
A good plan takes into account your trading style, risk management, and expectations. It lays out your entire approach to trade, from the ticker to your entry, exit, goals, stops, and more.
A trader who builds a thorough plan and follows it is more likely to keep a level head — meaning they’re less likely to make big mistakes.
Do You Need a Trading Plan?
Big mistake! While those things can help you choose stocks to trade, you need to combine them with a plan to get the best results.
Technically, no, you don’t need a plan to make a trade. But if you want to follow the trajectory of consistent traders before you, you’d be smart to use one.
A good way to build a trading plan to fit your account is to use an all-in-one trading platform like StocksToTrade. It has the essential trading tools and features that can help you formulate a game plan for each day. Try StocksToTrade today — get your 14-day STT trial for $7!
Planning: The Key to Long-term Trading Success
A trading plan gives you a clear-cut plan of attack for entering and exiting a trade.
It’s the difference between a calculated trade and the “hold-and-hope” mentality that causes so many traders to lose money.
Without a plan, you’re pretty much gambling. You might win here and there, but your progress won’t be as reliable as it would be with a plan in place.
Many traders who don’t use plans begin to see their losses exceed their gains, and they ultimately give up on day trading.
Don’t become a cautionary tale: Make a plan every time!
Trading Plan Essentials
Your plan for a trade should cover essentials such as an entry/exit plan, risk management, and trading goals.
An entry/exit plan should cover the key points at which you’ll enter a trade (buy) and when you’ll exit a trade (sell)…
Risk management is all about limiting your losses. The less money you lose — especially in your early trades — the longer you can stay in the game. Risk management can help you build healthier trading habits in the long term. It’s important to determine how much you’re willing to lose on a trade if things go south.
Remember, not every trade will be a winner.
Each trader’s plan is unique. There’s no one plan that fits all. Build a plan that best suits your needs and your goals as a trader.
6 Tips for Creating a Useful Trading Plan
Now that you understand the benefits of building plans for your trades, here are some tips on how to do it…
#1. Set Goals
What do you hope to gain from this trade? 10%, 20%? Try to set realistic profit goals. And if you’re new, it can help to start small, then increase your goals as you become consistent. Focus on gaining practice and experience.
#2. Focus on Risk
What’s your risk tolerance? Only you can answer that.
Before you enter a trade, consider how much of your portfolio you’re willing to risk on a given trade. Many traders stick to a rule of risking no more than 1% or 2% of their account. If you have a small account, you may decide to risk a little more to gain a bigger position…
Or you may decide to risk less to try to nail down your process and avoid blowing through your account. Either way, only trade with money you can afford to lose. Trading is risky!
#3. Do Your Research
Before you enter any trade, be sure to do your research. Seek out the big gainers, study the stock charts, and research potential catalysts that could move the stock.
Be diligent about this. Research can help you determine how a stock might perform. You can never be 100% sure, but you want to be able to say you did all you could.
#4. Plan Your Entry and Exit
Make a specific plan about when you’ll enter and exit a trade.
Decide what buy signals will be your green light to enter a trade, and only enter when you see them. Using a trading platform like StocksToTrade can help you determine buy signals.
But don’t just focus on buy signals. You need to plan to exit trades, too. Consider what you’ll do if a trade starts going south. What’s your stop loss? When will you get out if things don’t go your way? Resolve to get out at this point, and don’t take it personally. Never trade on your emotions.
And what’s your profit target? Be willing to get out once your profit target is met. Don’t get greedy.
#5. Write It Down
Write down your plan. Literally.
There’s a sense of accountability that comes with physically writing down your plan. Once you’ve written it, keep it where you’ll see it. Facing your trading plan as you take on the markets can help you stay accountable. Plus, then you have all that information to…
#6. Review the Trade Afterward
After you make a trade, take some time to consider how things went. Keep your notes from your plans and on how your trades play out in a trading journal or log. That can give you insight into what went right or wrong, and you can use it to inform future trades.
It can also improve your plan … You’ll get an idea of where you need to be more diligent.
Trading Plan Example
For an example of how to execute a plan, let’s take a look at one of my favorite stocks. Here’s the six-month chart for Tesla Inc. (NASDAQ: TSLA).
Tesla made a big, multi-day move with plenty of opportunities back in December. A good entry point would be the breakout, once Tesla broke the $450 mark.
Trading breakouts is one of my favorite ways to trade in 2021. Here we’re looking at a swing trade idea on a red-to-green breakout pattern.
First, you must wait for confirmation of the breakout. And you could set your risk on the $400 support line or on VWAP. Then plan your exit to take profits once momentum begins to slow. That’s all in theory, of course.
Whatever the trade, remember to set reasonable profit targets and a stop-loss order in case the trading pattern breaks down. Don’t get greedy. And don’t hold on hoping a bad situation will get better. It’s important to stick to your plan, take small gains when possible, and get out while you can!
Trading Plan and Trading System: What’s the Difference?
A trading system relies on an algorithm of technical indicators or fundamental analysis for signals on when and how to trade. It takes nothing about an individual trader into account. It’s a more hands-off approach to trading.
A trading plan is customized to suit a trader’s account, needs, and trading goals. To build a plan, you do the work. I’d opt for a plan over a system. It’s more hands-on, and you can adapt it to changing market conditions.
There are some benefits to using an automated trading algorithm like StocksToTrade’s Oracle Daily Alerts. With the Oracle algorithm, you get a list of 15 trending stocks every day. It’s up to you to narrow that list and pick the best ones for your strategy.
How to Combine Your Goals With Your Trading Style
Every trader has different goals. Some want to day trade. Others want to hold long term. You may have to tinker around to find what suits you.
Before hitting that buy button and opening your first trade, determine what kind of trader you are. What are your goals?
How often do you want to trade? What kinds of stocks do you want to trade? What’s your risk tolerance?
These are all important questions to ask yourself before you begin trading.
If you’re working a 9-to-5 job, you probably don’t want to be day trading. You may want to swing trade or even hold stocks for long-term trades.
The type of trading you choose should play a big role in your plans.
Long-Term Benefits of Trading Plans
Trading plans can change your relationship with trading. They can transform your mentality from chasing ‘bright and shiny’ stocks to making calculated trades.
By building thorough plans, you can begin to find ways to be more consistent in your overall approach.
Many factors in trading are beyond your control. But you can control when you pull out of trades — and that can help minimize your losses.
Learning how to create a plan is a vital part of your trading education.
Frequently Asked Questions About Trading Plans
Who Uses a Trading Plan?
A trading plan is for any trader, regardless of experience level — new traders, long-time traders, day traders, swing traders ... It’s a key step and important for any trader. If you want to be a smarter trader, consider using one.
Is It Possible to Create a Trading Plan for Forex?
Absolutely! It’s possible to create a plan for just about anything in the markets. I don’t trade forex, but if that’s your thing, great. Just make sure you do your research and know what you’re getting into.
Does Using a Trading Plan Guarantee Money?
Nope. Nothing in trading is ever guaranteed. That’s why you have a plan. Things can change in an instant when you’re trading stocks. Being prepared guarantees nothing — but it could help you better react when things don’t go the way you expect.
Can I Alter My Trading Plan Any Time?
Of course! A plan should NEVER be set in stone. It’s something you’ll work on and improve throughout your trading career. Still, always try to stick to your plan once you’re in a trade. Remember your entry/exit and risk management.
What Are the Key Elements That Should Be in a Trading Plan?
At a minimum, you want to set your entry and exit, risk management, and trading goals. Those are the key elements of any plan. You can include as much detail as needed for your research. Remember, the details you write down for every trade can help you in your analysis down the road.
Using the tips I just gave you, take the time to learn how to craft your trading plan. Test out strategies to find what works best for your account and your trading goals.
And if you’re looking to take your trading to the next level, consider joining the SteadyTrade Team. It’s a community of dedicated traders from around the world, run by seasoned pros. Our SteadyTrade Team mentorship program is all about helping traders learn to navigate today’s volatile markets. Sign up for the SteadyTrade Team today!
The market this year has been as volatile as ever. If you’re a newer trader, now is a great time to build your solid trading plan.
Be prepared to learn and work … Building a plan that fits your goals takes time, but it can be worth it in the long run. Test out strategies, learn different techniques, sharpen your skills, and study the markets.
Start your trading journey on the right foot with the StocksToTrade trading platform. The all-in-one platform for traders — get your 14-day STT trial for $7 today!
How do you plan your trades? What’s essential for your plans? Let me know in the comments!