It’s not pretty out there in market land. The vibe is terrible. The news is worse. The inter-day volatility makes it difficult to trade. Uncertainty reigns and fear envelopes all. Wow! I think I needed that bit ‘o whining. It’s all true though …

  • I have been investing for over ten years and started trading when I retired recently. I have read a lot of books and articles about trading and I cannot still figure out what a trading plan is. Kindly let me know what a trading plan is and how to get one.

I find it interesting that a reader asks about a trading plan on a day when I whine about how difficult it is to trade the inter-day volatility. I find these market days difficult because I cannot execute my trading plan. Now, when that happens, I simply step aside, take a break, get my bearings for a few days. Having stated this, I come back round to the question above.

Simply, a trading plan is a course of action designed to give you, the trader, a path to follow when trading, steps to take to achieve success. The plan can be long or short term, or both, for that matter. It is a way to control what you do and when you do it and the key aspect of it, the thing that makes it a plan is discipline. You have to follow your plan or else you don’t have a plan. Trading on whims is not a plan.

A trading plan consists of various parts. The first and, arguably, the most important, is how you define yourself as a trader. Are you a day trader or a position trader? Perhaps you prefer swing trading. Do you trade forex, ETFs’ futures, options, equities, or all of the above? Are you a fundamental or technical trader, or do you combine the two? You see, part of the plan is knowing what you like to do, how you do it, and then learning all you can about that. Me? I like to keep it simple because I am a simple guy. I trade one market and one market only – equities – and I use fundamentals to determine my trades. That is by design, a part of my plan. As well, I rarely trade in and out in a day, although it can happen, as my plan dictates that when I hit my profit target, I tighten my stops and sometimes that can take me out of a trade in a single day.

Part of your trading plan should include an education component. This means you study the heck out of your chosen market. You learn how that market works, the energies that affect it, the patterns it follows. In my case, my constant study is the global economy, in particular the US economy. I read the news daily, research data, and study history, both recent and long term. It also means you continue to educate yourself as a trader. Read books about trading, talk to other traders, and find a mentor.

Your trading plan includes strategy, which means you devise parameters around your money, money management. How much do you risk? How large is any position size? When do you take profit? It should also include parameters on how you enter a trade, how you exit a trade, and what conditions determine when you abrogate the rules on entering and exiting a trade. As well, part of the strategy is selecting software tools that help you find and confirm trades.

The above is a broad overview of a trading plan. You determine the details, I am, however, concerned that you say you have not found anything in your “extensive” reading about how to develop a trading plan, as devising a trading plan is the most basic and elemental part of becoming a trader. You can’t get where you want to go unless you know how to get there.

Given what I just wrote, please consider two key fundamentals of both trading and investing. First, never risk more than you can afford to lose. Second, protecting capital is the number one rule of trading and investing. BTW, stop looking for a trading plan; create your own.

Trade in the day; Invest in your life …

Trader Ed