Creating a Trading Plan (Part 1)
Part 1 - What, why, how! Setting Goals
One of the keys to success in trading is having a clear set of rules in place to guide your decision-making. Without a set of rules, or trading plan, it's easy to get caught up in the emotional rollercoaster of the markets and make rash decisions that can have negative consequences. Much like a business plan, a trading plan helps you to make more informed and confident decisions, and can provide a framework for entry and exits, managing risk, when to trade and other rules to help you run a successful trading business. By following a set of predetermined rules, you can avoid getting swayed by your emotions or reacting impulsively to market movements.
Creating a trading plan doesn’t have to be a daunting task. In this series of articles, we will go step by step and create a trading plan. By the end of this series, you should have a solid foundation for building a profitable and sustainable trading business.
Before we dive into the key components of a trading plan and begin working on our 2023 trading plan make sure you are subscribed so you can follow along week to week.
What to include in your trading plan:
What are your trading goals
What types of markets and instruments will you trade
Entry and exit rules
Risk management rules
Market timing rules
Routines
Resources you will use to help achieve success
Miscellaneous rules
As you work on building your trading plan, here are a few general pieces of advice to keep in mind:
Keep things simple. Don’t over-complicate your rules as this can lead to confusion and make implanting your rules consistently difficult.
Be patient. Building a trading plan won’t happen overnight. It can take time and trial and error to create a set of rules that work well for you and your personality.
Stay disciplined. Once you have your rules in place it is important to stick with them and avoid making exceptions.
Be open to making adjustments. As you trade and do post trade analysis, you may find that certain aspects of your rules are not as effective as you thought or have actually hurt performance.
Now that we’ve defined what a trading plan is and gone over some tips on creating one, lets get started on the first step: Defining your trading goals and identifying the markets and instruments you will trade.
It's important to have a clear understanding of what you hope to achieve as a trader and be realistic about your goals, as this will help you to select the types of investments that align with your objectives and risk profile.
Your goals might include maximizing returns, minimizing losses, or achieving a certain level of income or profit. Depending on your goals, you might choose to trade stocks, bonds, mutual funds, exchange-traded funds (ETFs), or options.
Example:
Goal:
Outperform the S&P 500 while maximizing returns and keeping drawdowns to within 15-20% of my equity curve peak.
What instruments will I trade:
I will look to primarily trade growth stocks showing strong technical action that also meet the fundamental criteria of CAN SLIM. I will use options as a way to hedge and generate income by selling covered calls and naked puts on stocks I am wanting to purchase at the strike price.
At this point we have defined our trading objectives and identified the instruments we will trade, we can move on to the next step of developing our trading plan: establishing entry and exit criteria. This is a crucial component of any trading strategy, as it helps establish the conditions under which we will enter and exit trades. We'll go over those in great detail next week in Part 2.
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The content presented is for informational and educational purposes only. Nothing contained in this newsletter should be construed as financial advice or a recommendation to buy or sell any security. Please do your own due diligence or contact a licensed financial advisor as participating in the financial markets involves risk.