What Is a Trading Plan? Including Strategy, Journaling, and Risk Management

Eda Kaya

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Eda Kaya
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A trading plan is a set of rules that governs all activities of a trader. A properly written trading plan helps mitigate the impact of emotions in trading and enables the trader to make informed decisions during volatile market conditions.

Moreover, establishing clear rules for various aspects of risk management, such as position sizing and trading plans for forex and other markets, facilitates better capital and risk management.

Trading Plan
A trading plan includes rules for all activities of a trader

A trading plan establishes a framework for the trader's activities, resulting in more organized operations and facilitating long-term performance review.

What Is a Trading Plan?

A trading plan is a comprehensive roadmap for trading that encompasses various elements, including trading goals, account management (encompassing capital, risk, and emotional management), trading strategy, trading times, and more.

The rules in this program encompass all trading activities and structure the trader's operations in the market.

Components of a Trading Plan

A comprehensive trading plan encompasses all the activities of the trader. Each section includes rules that define the framework of the trader’s actions.

Components of a Trading Plan:

  • Market Activity Goals: Define trading goals and expected returns within specific time frames (daily, monthly, yearly, etc.);
  • Trading Strategy: Select a strategy that aligns with your skills and goals;
  • Choosing the Right Market: Analyze and choose the most suitable market for trading based on your strategy;
  • Emotional Management: Control emotions and establish fixed rules to avoid emotional decisions in tense situations;
  • Timing: Determine the optimal time to trade; for example, only during the overlap of the New York sessions and London sessions;
  • Risk and Capital Management: Set the capital amount for trading and define the maximum allowable loss in each period (daily, weekly, monthly);
  • Trade Monitoring: Due to the high pressure of trading, predefine the actions to take during the trade before entering the market;
  • Journaling Method: Define the key components of a trade for journal writing.

Benefits of Using a Trading Plan

Market volatility often creates stress and anxiety for traders. However, having a specific trading plan ensures that the best trading decisions are made under various market conditions.

Benefits of a Trading Plan
Benefits of a Trading Plan

Benefits of a Trading Plan:

  • Reduced Emotional Impact: A trading plan prepares you for various trading scenarios, reducing the influence of emotions on decision-making;
  • Improved Risk and Capital Management: With well-defined rules for managing the account and consistent application, account control improves;
  • Increased Return Rate: A properly developed trading plan, when followed consistently, enhances the success rate of your strategy;
  • Structured Trading Framework: Defining proper rules for market activity creates a disciplined and continuous trading process;
  • Long-Term Performance Evaluation and Improvement: Following a trading plan allows for long-term review and correction of trading performance;
  • Avoiding Confusion and Emotional Decisions: Having clear rules for special situations prevents confusion and emotional, loss-causing decisions.

The Importance of a Trading Plan in Trading

At times, prices in various markets experience sharp fluctuations due to different factors. In such conditions, traders often make emotional decisions and expose their trading accounts to irrational risks.

A sound trading plan includes pre-determined actions for each of these conditions to ensure minimal risk and maximum return.

Furthermore, a good trading plan clearly defines the trading objectives, which helps prevent overtrading.

How to Create a Trading Plan?

Writing a proper trading plan involves evaluating multiple factors, such as price behavior in different markets, available capital, trading goals, and more.

Trading Plan Writing Tutorial
Each section of a trading plan must be aligned with other components

Steps to Create a Trading Plan:

  • Select a trading market
  • Determine trading hours
  • Set available capital
  • Define trading goals
  • Determine position size
  • Define trade journaling factors
  • Prepare a watchlist
  • Choose a trading strategy

Example of a Real Trading Plan

Suppose you intend to trade with a $1,000 capital using the ICT strategy. You now need to write a trading plan suitable for this capital. Below is a simple trading plan for trading with $1,000:

Sections of the Trading Plan

Selected Factor

Chosen Market

Forex Market

Trading Time

Overlap of the London and New York Sessions

Available Capital for Trading

$1,000

Trading Objective

0.5% profit per trading week

Journaling Factors

Reason for entering the trade, outcome, and emotions during the trade

Watchlist

EUR/USD, USD/JPY, USD/GBP charts

Position Size

0.5% risk of total capital per trade

Difference Between Trading Plan and Trading Strategy

A trading plan encompasses all aspects of a trader’s activity, from capital to analysis systems. In contrast, a trading strategy establishes rules for trade entry and exit, thereby improving the trade success rate.

Here is a comparison between the trading plan and trading strategy:

Trading Strategy

Trading Plan

Focuses on position size for each individual trade

Focuses on managing overall capital and account risk

Can be adjusted after each trade

Can be adjusted after long-term use

Only includes entry and exit conditions

Covers the full trading process, including timing and market selection

Aims for profit on individual trades

Aims for consistent long-term activity

Includes entry point, take profit, stop loss, etc

Includes trading time, capital, market, asset selection, and other relevant factors

Key Points for Using a Trading Plan

To use a trading plan effectively and achieve desirable returns, it's essential to follow certain principles, such as adhering to rules, regularly updating the plan, and reviewing its performance.

Key Points for Using a Trading Plan:

  • Updating the Trading Plan: Financial markets are constantly changing; adjustments to your trading plan should be made periodically;
  • Fixing Plan Errors: After some time, any flaws in the trading plan should be reviewed and corrected;
  • Commitment to Plan Rules: All updates or changes should be made when not actively trading, and all rules must be followed during live trades;
  • Market Compatibility: Every market has unique characteristics; the trading plan must be tailored to the specific market being traded.

Common Mistakes in Designing a Trading Plan

Mistakes in various aspects of trading plan creation such as goal-setting or market selection can reduce trading success and yield opposite results.

Common Trading Plan Design Mistakes
Poor goal-setting in a trading plan can lead to trader frustration and failure

Common Mistakes in Designing a Trading Plan:

  • Unrealistic Goals: Setting goals that are detached from reality or incompatible with capital can lead to discouragement and trading discontinuity;
  • Irrational Risk Management: Taking excessive risk in each trade shortens the lifespan of a trading career;
  • Ignoring Component Relationships: Failing to align various plan components results in ineffective performance and reduced success rate.

Conclusion

A trading plan is a set of rules encompassing all trader activities in the financial market.

It defines trading goals, market selection, trading strategy, trading time, and more, each with pre-defined decisions to be executed under specific conditions.

Having a sound trading plan reduces emotional influence in trading and streamlines capital and risk management. It also creates an organized structure that enhances the success rate of trading activities.

Strict adherence to rules, correction of plan flaws, and periodic updates are essential for boosting trade productivity. Conversely, poor goal-setting, irrational risk-taking, and lack of coherence among plan components decrease the likelihood of success.

FAQs

What is a trading plan?

A comprehensive and structured set of rules for trading.

What does a trading plan include?

It includes trading goals, strategy, market selection, timing, risk and capital management, and more.

What does goal-setting mean in a trading plan?

It refers to defining profit targets over specific periods, such as daily, weekly, or monthly.

How does a trading plan reduce emotional influence in trading?

It pre-establishes correct decisions for volatile market situations, eliminating the need for emotional reactions.

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