Sponsored Content - Trading plans are important for trading discipline and success. Simpler Trading’s Taylor Horton explains what’s in a trading plan and how to create one.
Becoming a trader can provide enormous career benefits for those wanting to escape the job field—financial independence, personal growth, and the ability to work from almost anywhere. To achieve those benefits, traders must approach their market efforts with intent and discipline. Creating a trading plan helps a trader articulate a focused strategy and a structure to execute that strategy. Having a trading plan in place has definitely been one of my keys to success as a trader.
What Is a Trading Plan?
A trading plan is a document that defines a trader’s daily efforts and longer-term goals in the market. It can be simple or complex—it’s up to the individual. A trader just starting out may only have a one-page trading plan. But, as they gain skills as a trader, they will probably decide to develop their plan along the way.
At Simpler Trading, all of us have trading plans. John Carter, our founder, developed a trading plan template to help new traders get started, and everyone on our team has used it as a basis for their own planning, myself included!
A good trading plan starts with a personal risk assessment. Traders need to define their risk tolerance, per their account size. In trading there are no guarantees—a trader must be honest about how much they are willing to lose in a trade. As a rule of thumb, a default risk for a day trade is 5% of the total account value. Some traders are willing to risk more, some less.
This is the beauty of having a plan. Bottom line, being a responsible trader means that trading losses don’t jeopardize personal financial security.
Here are some other critical parts of a trading plan:
- Trading rhythms and time frames
- Trading markets
- Areas of focus—industries, types of securities, etc.
- Daily routines for research and preparation
- Conditions necessary for trade entries or exits
- Tools and indicators used
A trading plan should also include tough love. Uncertain markets don’t bend to our will. The key is to not let losses overtake gains. Traders need to keep emotions in check and stay consistent.
Most importantly, a trading plan belongs to the trader and should include whatever definitions and guidelines are needed to maintain trading discipline.
How to Create a Trading Plan
Developing a trading plan is really about asking a series of questions and documenting the answers so that once trading starts, the trader has an established roadmap.
A trading plan can be highly influenced by what is learned from other traders. A coach or mentor can help traders as they establish a disciplined trading plan and risk parameters to prepare them for the road ahead. My trading plan is published in my profile, and I refer to it a lot when I mentor others on trading strategies, specific setups, etc. Feel free to check it out!
Trading plans are not permanent and unyielding. Traders update these plans that are designed to grow along with their trading experiences. Trading plans also change to accommodate market conditions. As traders experience the ebb and flow of the market, they learn they no longer need to fear surprises if they follow their plan. The market is going to do what the market does, but the trader should always stick to their plan.
We encourage members at Simpler Trading to make their trading plans very specific…that way, when they are looking at a potential trade, their plan lays out the conditions before jumping in. When the markets get crazy, the decision-making process is streamlined, and the trader is positioned to take advantage of an opportunity.
What Are the Benefits of a Trading Plan?
Trading can and will be stressful. A trading plan provides the guidance that enables traders to stay focused on their long-term goals. Trading plans allow traders to have a clear understanding of the setup and can prevent trading based on emotion.
A trading plan also allows traders to keep their risk tolerance in check. By calculating the percentage of the overall account that is tied up in trades, traders can limit their losses to prevent wiping out their account balance. This also enables traders to be honest about how many positions they can handle at one time. Ultimately, it’s better to focus on a few higher probability trades than by “overtrading” in the market.
As a matter of routine, traders should perform an overview each December. By doing an annual review of what trades performed the best and worst, along with a plan to adjust for the following year, traders can have honest insight into their own psychological makeup while trading. More importantly, they should update their trading plan from what they’ve learned in the past year and enter a new season with a revised and refreshed roadmap.
Is your trading plan in place? Is it in need of a refresh? Now is a good time to take a look at your trading goals and make sure your plan can get you there!
For more information on all trading topics, including my courses and live trading, visit simplertrading.com.