What is a Trading Plan

A trading plan is a systematic method for identifying and trading securities that takes into consideration a number of variables including time, risk and the investor’s objectives.


Trading plans can be built in a variety of different ways. Investors will typically customize their own trading plans based on their personal goals and objectives. Across the investment industry there are several mechanisms ingrained within the trading market that can also help to form profitable trading plans.

Above all else, investors seek trading plans that will result in profit. Some investors may seek to create a trading plan that involves automated investing as part of a savings strategies. Other investors may seek to deploy a trading plan as part of an active investing approach that seeks to capitalize on profitable market opportunities by making tactical trades.

Automatic Investing

Automatic investing is one of the best ways to integrate a trading plan as part of a savings strategy. Brokerage platforms allow investors to customize automated investing at regular intervals. They also allow investors the flexibility to automatically invest funds into designated investments. Many investors use automated investing to invest a specific amount of money each month into mutual funds. Using this trading plan an investor can automate investing into managed funds of their choice. With this approach the investor usually accepts the market price for their investment and is not particularly concerned with investing at a specified price. In this scenario investors will generally rely on fund management to manage the risk of their investments however they may make tactical changes over time as market environments change.

Tactical Trading

Many investors choose to use tactical trading plans to invest for various objectives or to take advantage of emerging market opportunities. Tactical trading can be used by both active investors and technical analysts. Both types of traders will generally use customized trading plans to help manage the risks of an investment and tailor it to their specific goals. Technical analysts will rely on charting patterns to guide their tactical trading plans. Other investors may use a variety of screening methodologies to identify investments opportunities for potential profit. Generally, most tactical traders will seek to follow and trade around macroeconomic trends which have a substantial affect on the investing market holistically.

Conditional Orders

Once an investor has identified an investment for potential profit, they can build a trading plan around it. Conditional orders are offered by all types of brokers to give investors the opportunity to customize their trading plans to meet their specific preferences. There are a wide variety of orders and trading plans integrating conditional orders that can be used by investors.

Most tactical traders will consider stop loss and profit limit orders in their tactical trading plans. Deploying these conditional orders can help an investor to set parameters for losses and gains. One of the most common tactical trading plans an investor will use is the bracketed buy order. With this order an investor can buy a stock they are interested in and simultaneously set a stop loss and profit limit order based on their risk tolerance. The profit limit order provides for a guaranteed gain when the stock reaches a specified price. The bracketed buy order will also generate a specified loss if the stock falls to the stop loss price.

Technical analysts and day traders executing a large volume of trades per day may use conditional orders to execute more complex investing strategies. These investors more actively trade in the market and seek to identify profit opportunities from day to day movements in security prices. For these traders, grid trading plans may commonly be a part of their trading regime. Grid trading plans use investable capital to place trades based on percentage moves in a security’s trending price. Grid trading can be automated through a technical trading system. This type of trading can be used to incrementally obtain profit form a security price trend while also incrementally managing risk.

Active Trading Considerations

Tactical trading can be a profitable way to identify profit opportunities in the investing market. However, all types of active traders must be aware of the caveats involved with short term trading plans. One of the greatest considerations for active traders is the tax involved with short term capital gains. Any capital gains earned from holding an investment for less than a year will be taxed at the investor’s ordinary income tax rate. This tax rate is typically significantly higher than the long-term tax rate which can be a substantial factor in investment analysis for many investors.