10 Steps to Building a Winning Trading Plan

There is an old expression in business that, if you fail to plan, you plan to fail. It may sound glib, but people that are serious about being successful, including traders, should follow those steps as if they are written in stone. Ask any trader who makes money on a consistent basis and they will probably tell you that you have two choices: 1) methodically follow a written plan or 2) fail.

If you already have a written trading or investment plan, congratulations, you are in the minority. It takes time, effort, and research to develop an approach or methodology that works in financial markets. While there are never any guarantees of success, you have eliminated one major roadblock by creating a detailed trading plan.

Key Takeaways

  • Having a plan is essential for achieving trading success.
  • A trading plan should be written in "stone", but is subject to reevaluation and can be adjusted along with changing market conditions.
  • A solid trading plan considers the trader's personal style and goals.
  • Knowing when to exit a trade is just as important as knowing when to enter the position.
  • Stop-loss prices and profit targets should be added to the trading plan to identify specific exit points for each trade.

If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to study and modify your course. By documenting the process, you learn what works and how to avoid the costly mistakes that newbie traders sometimes face. Whether or not you have a plan now, here are some ideas to help with the process.

Disaster Avoidance 101

Trading is a business, so you have to treat it as such if you want to succeed. Reading a few books, visiting webinars, buying a charting program, opening a brokerage account, and starting to trade with real money is not a business plan—it can be a recipe for disaster.

A plan should be written—with clear signals that are not subject to change—while you are trading, but subject to reevaluation when the markets are closed. The plan can change with market conditions and might see adjustments as the trader's skill level improves. Each trader should write their own plan, taking into account personal trading styles and goals. Using someone else's plan does not reflect your trading characteristics.


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Building the Perfect Master Plan

No two trading plans are the same because no two traders are exactly alike. Each approach will reflect important factors like trading style as well as risk tolerance. What are the other essential components of a solid trading plan? Here are 10 that every plan should include:

1. Goal Definition

Firstly, if you are new to trading, you should determine financial objectives, risk tolerance, and time horizon. These items need to be clearly articulated to ensure that your trading activities can be achieved.

2. Trading Style Selection

A trading style needs to be identified. This style should reflect your personality, culture and preferences. The plan can include day trading, swing trading, position trading or long-term investing. The chosen style should align with one's goals and time availability.

3. Strategy Development

A detailed strategy needs to be created. This strategy outlines an approach to the markets. Also a criteria for trade selection needs to be defined. This can include technical indicators, fundamental analysis or a combination of both. Finally when building the strategy, entry and exit tactics, risk management techniques, and position sizing rules need to be specified.

4. Realistic Expectation Setting

Trading is not a guaranteed path to wealth and involves inherent risks. Realistic expectations for returns need to be set and the potential for losses needs to be recognized. You should avoid the trap of chasing quick profits or risking too much capital on a single position or trade.

5. Comprehensive Market Analysis

You need to conduct thorough market analysis to identify potential trade opportunities. If they are part of your plan, analyze charts, market trends should be studied, news and economic indicators have to be monitored. Take a step back and consider the overall market condition.

6. Risk Management Rule Development

In order to protect capital, risk management strategies should be implemented. Allocate a percentage of your portfolio for each trade and don't go above the amount you have determined is right for your account. This amount should be equivalent to the amount that you are willing to lose per trade. Make use of stop loss-orders to limit potential losses and establish clear take profit targets to secure gains.

7. Trade Management Plan

Determine how you will manage open positions. You should determine when to adjust stop-loss orders, take partial profits (possibly through the use of trailing stops), or exit the trade entirely.

8. Trading Discipline Maintenance

Once you have written your trading plan down, stick with it, Avoid situations where you abandon your trading plan impulsively because the market is doing something that elicits an emotional response from you like fear or greed. Train yourself to embrace discipline and consistency when executing and exiting trades.

9. Monitoring and Trade Evaluation

A detailed record of trading activity, including entry and exit points, reasons for taking the trade, and the outcomes are essential. A frequent review and evaluation of trades is necessary to becoming a good trader. The evaluation and review of your past trades will allow you to identify patterns, strengths, and areas for improvement.


The percentage of day traders that quit within two years, according to a 2017 paper titled "Do Day Traders Rationally Learn About Their Abilities" by Barber, Lee, Liu, Odean, and Zhang.

10. Continuous Education

Stay updated on market trends, economic news, and new trading techniques. Read books, attend seminars and webinars, follow reputable financial news sources, and interact with experienced traders to enhance your knowledge and skills.

Why should Traders develop a Plan?

Traders should develop a plan in order to maintain a disciplined and systematic approach to their trades. Also, a well defined trading plan helps remove subjectivity from trading decisions.

A trading plan incorporates risk management strategies such as setting stop-loss orders and determining position sizes based on risk tolerance. Without a plan, traders may expose themselves to excessive risk or fail to implement appropriate risk management measures.

How to Determine Risk Tolerance when Trading?

Some key factors when traders assess risk tolerance are the financial situation of the trader, the investment goals, risk appetite as well as experience and knowledge of the financial markets. A risk tolerance questionnaire or even a meeting with a financial advisor will help determine your risk tolerance.

How to Analyze Trading Performance?

There are a number of ways to analyze trading performance. A few common methods include calculating the total return of the trades, determining the profit factor as well as using the Sharpe ratio. Other metrics include analyzing the win rate, the average win amount, the average loss amount, the drawdowns and the recovery rate. In this case, the recovery rate is the percentage of the drawdowns that the trades recovered.

What Benchmarks can be used for Trading?

Benchmarks serve as reference points or as performance indicators to assess the success and effectiveness of one's trading strategy. Some common benchmarks include: market indices, professional fund managers, mutual funds or even absolute return targets.

What are the best timeframes to use for trading?

The best trading timeframe is dependent on the trader's style, personal preferences, time availability and the specific market or instrument. There are different time frames for different styles of trading, for instance the following all have very different time frames: position trading, swing trading, day trading and scalping.

The Bottom Line

Successful practice trading does not guarantee that you will find success when you begin trading real money. That's is because trading real money is when emotions come into play. But successful practice trading does give the trader confidence in the system they are using, if the system is generating positive results in a practice environment. Deciding on a system is less important than gaining enough skill to make trades without second-guessing or doubting the decision. Confidence is key.

There is no way to guarantee a trade will make money. The trader's chances are based on their skill and system of winning and losing. There is no such thing as winning without losing. Professional traders know before they enter a trade that the odds are in their favor or they wouldn't be there. By letting their profits ride and cutting losses short, a trader may lose some battles, but they will win the war. Most traders and investors do the opposite, which is why they don't consistently make money.

Traders who win consistently treat trading as a business. While there is no guarantee that you will make money, having a plan is crucial if you want to be consistently successful and survive in the trading game.

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  1. Barber et. al. "Do Day Traders Rationally Learn About Their Ability?," Page 1.

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