Making an effective trading plan is the number one rule for success as a trader.
A trading plan should detail your motivation for trading, your stop losses, your goals, your risk-reward ratio, which trading strategies you’ll implement, and so on.
Most importantly, a trading plan is designed to change with your needs: as you progress in your trading, you’ll likely find you need to make changes to your strategy, your hours, or your goals.
Make sure you save a version of each plan on your laptop before you begin a new one - this is so you have each document ready to access should you choose to revert to a previous version!
In this blog we look at all the things you should include in your trading plan, and how to make it as effective as possible. Here’s the checklist...
Why do you want to be a trader?
It may feel ridiculous to write this down at first, but it will help to clarify your reasons for trading in your mind.
Whether it’s earning more income for travelling the world or raising your portfolio to trade full-time, it’s important to write your motivation as clearly as possible to enhance your focus and keep your goals to the forefront of your mind. Be bold!
Make your goals as realistic as possible without losing your ambition. How much do you want to increase your portfolio by? Is that realistic in the timeframe you’ve given yourself?
Like your motivation, it’s important to write your goals down to keep them clear. If there’s space, you could even print these to tape above your desk for a little inspirational boost when you need a reminder to keep persevering!
Hours to commit
How much time you have to commit to trading will shape your trading plan, your goals and your style. Will you trade in the evenings, or on your day off? Will you block out time in your Google Calendar every week, or trade whenever you have a spare few hours?
Finding the right hours for you will take time, so many traders find this requires trial and error. This is what your trading plan is for: to keep track of your changing strategies, hours or stop losses.
For more tips on finding the time to commit to trading, read our blog on 5 Tips for Fitting Trading Around Your Day Job.
Your risk-reward ratio is one of the first elements you should incorporate into your trading plan. Put simply, a risk-reward ratio measures the difference between the profit potential of a trade relative to its loss potential.
So - what should your risk-reward ratio be? It’s a personal choice that will depend on your available capital and how much you are willing to risk, but it’s generally recommended that you risk no more than 1-2% of your capital per trade.
Any more than 4 or 5% is considered high risk, so it’s best avoided if possible! Generally speaking, a good risk reward ratio is usually anything greater than 1 in 3.
Find out more about calculating risk-reward ratios on our 4 Most Popular Trading FAQs Answered blog.
Which strategies will you implement? Will you use technical or fundamental analysis - or both? Will you try scalping or trend trading?
Your strategy should match your trading level as well as your mindset: for example, using daily pivots can be suited to a trader of any experience, while scalping is generally better suited to those who are comfortable taking risks.
It’s important to make sure you note down which strategy you’ll be using so that if you need to change it later on, you’ll have a note of exactly what you were doing beforehand.
Setting a stop loss - an order placed to buy or sell once an asset reaches a certain price - is a key part of trading as it will help you to minimise and manage your losses.
But make sure you’re strategic here: choose a stop-loss percentage that allows the market to fluctuate day to day while preventing as much loss as possible.
For example, setting a 5% stop loss on a stock that has a history of fluctuating 10% or more in a week would not be the best idea - so make sure what you choose is realistic, both for you and the markets.
How much capital are you willing to put aside for trading?
This can be a tempting one to skip over, but it’s important to write it down as you’ll be far more willing to commit to it. It’s important to be realistic here: only risk what you can afford to lose.
How will you assess your trading as you go? Once a week? Once a fortnight?
It’s important to reflect on your trading as you go so that you can monitor your performance. What’s going well, and what could be improved? Are the strategies you’re using working for you? Are you willing to invest more capital? Is your risk-reward strategy too high, or too low?
As we mentioned above, you’ll likely need to amend your trading plan as you go along, so make sure that once you decide to make some changes you save a version of each plan on your laptop, as you’ll want to refer back to the previous one.