Let me ask you a question.
Do you have a trading plan?
And before you answer, let me clarify what I mean.
I’m not asking if you have a strategy.
I’m not asking if you have a favorite indicator.
I’m not asking if you have a list of stocks you like.
And I’m definitely not asking if you’ve got a folder full of screenshots from the last 47 YouTube videos you watched.
I’m asking:
Do you have a plan for how you are going to operate as a trader?
Because those are two very different things.
A strategy tells you how to trade a particular setup.
A trading plan tells you how you’re going to run your trading business.
And if you’ve been following along with this series, you should now know what kind of trader you are and you’ve taken a hard look at some of the reasons traders fail.
Now it’s time to put some structure around it.
Trading Is a Business
Here’s a simple analogy.
Imagine you decided to open a construction company.
You get a truck.
You buy some tools.
You print some business cards.
You put a sign on the truck.
Then you start driving around town looking for somebody who needs a deck built.
Would you call that a business?
Technically, I suppose it is.
But it’s probably not going to be a very good one.
You need to know what kind of work you’re going to do.
You need to know what it costs.
You need to know how you’re going to price jobs.
You need to know how much money you need to make.
You need a process for finding customers.
You need a process for doing the work.
You need to manage your cash flow.
You need to deal with mistakes.
You need to measure your results.
In other words:
You need a plan.
Trading isn’t any different.
Yet traders routinely put thousands of dollars into the market with less planning than they use to order a pizza.
That’s backwards.
Your Trading Plan Isn’t a Prediction
One of the biggest misunderstandings about a trading plan is that people think it needs to predict the future.
It doesn’t.
You can’t predict what the market is going to do.
Your plan should tell you what you are going to do when the market does something.
That’s a completely different mindset.
For example:
“I think Apple is going higher.”
That’s an opinion.
Try this instead:
“If Apple breaks above resistance, confirms the setup, and meets my entry criteria, I’ll consider entering the trade. If it moves against me and reaches my predetermined risk level, I’ll exit.”
Now you’ve got something you can actually execute.
You’re not predicting.
You’re preparing.
And preparation is a hell of a lot more useful than prediction.
The Seven Parts of a Trading Plan
I like to keep things simple.
Your trading plan should answer seven questions.
1. What Are You Trying to Accomplish?
Start here.
Not with an indicator.
Not with an entry signal.
Start with your objective.
Are you trying to:
- Grow your capital?
- Generate income?
- Preserve capital?
- Build long-term wealth?
- Supplement your income?
- Become a full-time trader?
- Learn a skill?
These aren’t necessarily the same objective.
If you don’t know what you’re trying to accomplish, it’s pretty difficult to know whether you’re succeeding.
And here’s something important:
Your goal shouldn’t simply be “make money.”
Everybody wants to make money.
That’s not a plan.
Get more specific.
How much capital are you starting with?
What is a reasonable return expectation?
What amount of risk are you willing to accept?
How much time can you devote to trading?
What does success actually look like?
Define it.
2. What Kind of Trader Are You?
We covered this in the first article.
Now we’re going to use it.
Are you:
A day trader?
A swing trader?
A position trader?
An investor?
An income trader?
Maybe you’re some combination.
That’s fine.
But you need to know what game you’re playing.
If you have a full-time job and three kids, building your entire trading plan around staring at a five-minute chart for six hours a day probably isn’t going to work.
You don’t need a better alarm clock.
You need a different plan.
Your trading strategy needs to fit your life.
3. What Are You Going to Trade?
This sounds obvious.
It isn’t.
The market gives you an enormous number of choices.
Stocks.
ETFs.
Options.
Futures.
Currencies.
Crypto.
Commodities.
Indexes.
You don’t need to trade all of them.
In fact, you probably shouldn’t.
One of the biggest mistakes new traders make is believing that more opportunity is better.
It’s not.
More opportunity usually means more decisions.
More decisions create more chances to make mistakes.
You don’t need to trade everything.
You need to find the things you understand.
Maybe your universe is:
“Large-cap U.S. stocks with liquid options.”
Great.
Now you’ve eliminated thousands of possibilities.
That’s progress.
4. How Will You Find Opportunities?
Now we get into the actual trading process.
Where do your trades come from?
You might use:
- A stock scanner
- Finviz
- TradingView
- Fundamental screens
- Technical patterns
- Market indexes
- Sector strength
- Watchlists
- Earnings
- Volatility
- Support and resistance
The tool doesn’t matter as much as the process.
Here’s the progression I like:
Market Universe
↓
Scan
↓
Watchlist
↓
Candidate
↓
Setup
↓
Trade
The scanner doesn’t give you the trade.
It gives you candidates.
The watchlist doesn’t give you the trade.
It gives you candidates worth studying.
Your analysis determines whether a candidate becomes an opportunity.
And your trading plan determines whether that opportunity becomes a trade.
That’s a very important distinction.
5. How Will You Enter?
This is where most traders start.
It’s also where I think they should start much later.
Once you’ve answered the bigger questions, you can define your entry.
What has to happen before you enter?
Maybe you require:
- A trend
- A breakout
- A pullback
- Support
- Resistance
- A moving-average relationship
- Volume confirmation
- Relative strength
- A specific candlestick pattern
Whatever your rules are, write them down.
Don’t leave them floating around in your head.
Because here’s what happens when your rules are in your head:
Your brain changes them when you’re emotional.
Yesterday:
“I need confirmation.”
Today:
“Well, this one looks pretty good.”
That’s how rules disappear.
Write them down.
6. How Will You Manage Risk?
This is arguably the most important part of your trading plan.
Before you enter a trade, you should know:
How much am I willing to lose?
Not:
“How much do I hope to make?”
That’s the wrong starting point.
Risk first.
Reward second.
Ask:
- How much capital am I risking?
- Where am I wrong?
- Where is my stop?
- How large should my position be?
- How much total portfolio exposure do I have?
- How correlated are my positions?
- What happens if the market gaps against me?
You don’t get to control the market.
But you can control how much damage the market is allowed to do to your account.
That’s your responsibility.
7. How Will You Know If You’re Getting Better?
This is where the journal comes in.
If you don’t measure your trading, you’re guessing.
And guessing isn’t good enough.
Track your trades.
Record:
- Entry
- Exit
- Strategy
- Risk
- Result
- Reason for entry
- Reason for exit
- Mistakes
- Emotions
- Lessons
Then review the data.
Don’t just ask:
“Did I make money?”
Ask:
“Did I execute my plan?”
That’s a much better question.
Because you can make money on a terrible trade.
And you can lose money on an excellent trade.
One trade doesn’t tell you much.
A series of trades starts telling you something.
Your Trading Plan Should Be Boring
Here’s a funny thing about trading.
The more exciting your trading plan sounds, the more suspicious I become.
If your plan involves:
- Predicting every market move
- Finding the next 10-bagger
- Using 14 indicators
- Trading every market
- Doubling down after losses
- Making 20 trades a day
…I’m probably not interested.
I want boring.
I want repeatable.
I want measurable.
I want something that I can execute when I’m tired, distracted, nervous, or having a bad day.
Because that’s when the plan really matters.
Anyone can follow a plan when everything is going perfectly.
The plan earns its money when things go wrong.
Your Plan Is a Contract With Yourself
This might be the most important way to think about it.
When you write a trading plan, you’re making decisions before you’re under pressure.
You’re telling your future emotional self:
“Here’s what we’re going to do.”
And then the market comes along and tests that agreement.
That’s why a plan is so valuable.
It creates a separation between:
What I think right now
and
What I decided when I was thinking clearly.
Your emotional brain is going to have some pretty creative ideas once you’re down 15%.
That’s why you need a plan.
The Trader’s Constitution
If you want to take this one step further, think of your trading plan as a constitution.
It establishes the rules.
You don’t change the Constitution every time somebody gets upset.
You don’t change your trading plan every time you have a losing trade.
That doesn’t mean the plan can never change.
It should.
But changes should come from analysis, not emotion.
If your data tells you something isn’t working, change it.
If your life changes, change it.
If your goals change, change it.
If your strategy improves, change it.
But don’t change your plan because you just lost money.
That’s not improvement.
That’s emotional reaction.
Your Trading Plan Checklist
Here’s what I want you to have written down:
My Objective
What am I trying to accomplish?
My Trader Type
What kind of trader am I?
My Markets
What am I going to trade?
My Time Frame
How long do I expect to hold positions?
My Strategies
What specific strategies am I going to use?
My Entry Rules
What has to happen before I enter?
My Exit Rules
What tells me to take a profit?
My Risk Rules
How much can I lose?
My Position Sizing
How much capital goes into each trade?
My Routine
When and how do I prepare?
My Journal
How will I record and review my decisions?
My Performance Metrics
How will I know whether I’m improving?
If you can’t answer these questions, you don’t have a trading plan yet.
And that’s okay.
Now you know where to start.
Don’t Build the Perfect Plan
This is where I want to leave you.
Don’t spend six months writing the perfect trading plan.
You’ll never finish.
Build a good enough plan.
Trade it.
Measure it.
Learn from it.
Improve it.
Then repeat.
Remember the process:
Plan
↓
Execute
↓
Record
↓
Review
↓
Improve
That’s how traders develop.
Not by finding the perfect strategy.
Not by predicting the market.
Not by eliminating every losing trade.
By building a process and getting better at executing it.
Your trading plan is not supposed to tell you what the market will do tomorrow.
It’s supposed to tell you what you’re going to do when tomorrow arrives.
That’s a much more powerful thing.
Trade well.
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