One cornerstone in achieving trading success is the completion of your trading plan. I am not talking about a vague idea you have in place on how you engage the market. I am talking about a solid written plan that describe all aspects of your trading. This plan is what you would follow during trading no matter what happens. Thus, the plan has to be comprehensive enough to cover many scenarios that you may encounter during trading. The process of writing your own trading plan can be described as a discovery process of yourself and your best chance of success in trading given the circumstances you are in.
Everyone Has a Different Definition of Trading Plan
Famous traders throughout history have given us ample descriptions of what constitute a good trading plan. However, their approaches to writing the trading plan varies drastically. This boils down to one reason why we are not getting a simple answer for the definition of trading plan. There is no clear definition of trading plan because no one can agree on what a trading plan is.
For some, a trading plan is simply how they are going to engage the market with entry and exit methods.
For others, they need clear rules defined to guide them on position sizing in addition to precise entry and exit strategies.
The better trading plans, judged by the success of the traders I have seen, often include trading goals and performance targets in addition to the topics mentioned above.
For those successful traders who treat trading very seriously, they go all out with a comprehensive business plan covering all aspect of their trading businesses.
As a summary, I will say a trading plan should be a complete business plan covering all aspects related to one’s trading business.
For certain parts of the plan, depending on the trader’s experience with trading, may be skipped or very brief in nature. For example, the trading platform choice can be one of the topics coming up in the trading plan. It may not matter at all in the first trading plan on what platform you are going to use because you have access to only one platform with the brokerage you are using anyway. But down the road, you may find that using a different trading platform can be more convenient or efficient for your trading need. Having information on trading platforms in your trading plan with your pros and cons analysis on different platforms will help you choose the right one.
Reluctance to Write Your Own Trading Plan Is a Sign of Your Ego Defending Itself
Many people think that writing out their trading plans is not necessary since their approaches in trading are very simple. When I made them doing it the resistance grow as if I am questioning them whether they know what they are doing. Some go all the way with anger and refused to even verbally explaining their plans in details.
Many others say that they cannot write out their plans because they are so complex that it will become a tedious task that takes up too much time and effort. I questioned them whether they can fully comprehend their own plans. Given how complex their plans are, it is doubtful they can execute their own plans correctly.
Procrastination of writing your own trading plan is a sign that your ego is defending itself. As a person, our egos gives us a sense of identity and assurance of self worth. When we force ourselves into writing out our trading plans, for our egos, it means facing the past trading mistakes which is something unpleasant to do and definitely something to avoid. Since majority of people do not like to face judgment by others, let alone facing our own honest evaluation, the writing of our trading plans become a very difficult task to do even though we know it is very important to have one.
To overcome the procrastination and to stop your ego from jeopardizing your effort to complete your trading plan, remind yourself that almost all traders who trade without a good trading plan in place eventually will fail miserably. Visualize the joy of success when you trade with confidence and stress free thanks to having a trading plan in place. This should motivate you to get started with your writing.
Many traders I work with took a long time before they finally took the plunge to write their first trading plans. As the process started and my feedbacks to them got the ball rolling, they would open up and no longer feel bad when talking about their trading mistakes. The ability to acknowledge the past empower them to use the past experience as a guide to do better in the future.
Writing Your Trading Plan Does Not Start With the Writing Process
A trading plan is the summary and logical extensions of what you know about youself, the market you trade and other factors affecting your trading that enables you to trade profitably when you follow your plan. But it is impossible to write your trading plan properly until you have tried to trade in various ways and methods first to gain the necessary basic knowledge. As an example, one cannot write a business plan that makes sense on running a restaurant without background knowledge on how to source the food supply, on the customer preferences given the traffic pattern of the chosen location, etc.
Hence, giving trading a try without a plan in place is a necessary step. Reading up many trading books to gain some background knowledge about trading is also useful. There is no right or wrong approach to trading at this stage with the exception of capital preservation being the highest priority. Since there are many simulator for trading out there nowadays, it is now much safer to learn trading comparing to many years ago.
Some people get the chance to trade at trading firms with good mentoring programs have the advantage of gaining knowledge of best practices and good trading habits. But normal people who give trading a try themselves can also learn about these things from books and trading coaches. Eventually, it depends on the person to take on the better ideas and integrate them into their own trading routines.
Unrelated to writing the trading plan but important for trading success, is that during this knowledge acquisition phase, one should learn to control or separate emotions from trading. If it is done right during this phase, you will save a lot of time when you go into the next step of trading with real money.
To best utilize the learning phase of trading without a plan and trying out various trading methods is to write down your thoughts, feelings and trading results as if you are your own coach analyzing your trainee. Do not let your ego equate the results as your own success or failure. Think of this as an experiment that you have conducted to test what works for you. The information you gathered from this process will help you figure out what will likely work best for you in real trading.
Trading Plan Is a Contract With Yourself Forging Commitment and Consistency
Psychologically, it is difficult to change oneself especially those bad and destructive behaviours. In trading we often encounter moments that trigger our emotions and next thing we know we could be trading out of control. It happens to everyone and the good traders learned to put this under control by two key elements. First, having a balanced mind and body before we start our trading day. This can be achieved through better lifestyle, mental exercise and physical training. Second, delegating the majority of the decision making process into a well constructed trading plan. Hence a trading plan is a very important component in keeping ourselves from hurting our trading business.
The power of a written trading plan lies in the fact that you have put a lot of effort in thinking about all the things that can happen during trading, making you more mentally prepared and ready for uncertainties. As oppose to reacting emotionally to sudden changes in the market, you have planned reactions based on your trading plan that was written with well thought out decisions that are logical and protective of your trading capital.
In short, your trading plan is your commitment to yourself to trade more responsibly so that your trading goals can be achieved. Without a plan in place, your emotions swing harder during trading and in turn affects you from making sound trading decisions. A good trading plan is one’s ticket to better trading consistency.
Guided Trading Plan Writing
This issue comes up often as many traders keep saying they do not know what to put into their trading plans. The problem, however, is not that they do not know what to write in their plans as there are many books and online resources talking about trading plan writing already. The problem is that these traders need feedback from others telling them if their trading plans make sense. They also want to know if something is missing from their trading plans.
The dilemma of letting others to review your trading plan is that your personal feelings and details may not be suitable for public discussion. Unlike a dissertation written by a PhD candidate, trading plans often include our character analysis or even some deep down feelings about ourselves that is preferred to be kept privately. This is the main reason why you do not see successful traders having their trading plans disclosed publicly. Not only because there are proprietary trading secrets within their trading plans, it is also because of personal matters are not suitable for public disclosure.
Hence, an alternative approach is to find a trusted trading partner or a reputable trading coach to assist you in writing your trading plan. Hiring a trading coach sounds expensive but stuck at the learning phase of trading and not able to move pass your own trading obstacles is even more costly. It is common some professional traders spend several weeks every year working with their trading coach to revise their trading plans. It is no different from good entrepreneurs having their advisers helping out with the revisions of their business plans. To put this into perspective, it is all part of the cost in running your business.
Trading is a craft that takes both knowledge building and experience accumulation. During the process of gaining on both grounds, our thought process can be so crowded it affects our ability to perform consistently. The key to separate our learning self and performing self while monitoring the markets is to lay down a clear guideline for ourselves to follow in trading. Such guideline is best expressed in the form of a trading plan. A trading plan has to be as detail as needed to suit our personal belief system so that we are convinced to commit to the rules and boundaries we set forth for ourselves. We have to write it in a way that utilize our own best judgment so that we are confident that when we follow our plans it is the best way to conduct our trading.
Nothing can replace a good trading plan. Having one in place promotes better consistency in trading performance. It also builds confidence in ourselves while we face uncertainties every trading day.
2 Replies to “Writing Your First Trading Plan”
Alamak ! LC this piece should have been written and publish right from the start ! Any statistics to give a feel the success rates of those that have a trading plan from those that have non. And those that have a trading plan, do they eventually become profitable consistently? Thanks !
I do not have exact statistics on the success rate.
Majority of retail traders start out trading after reading about it from the net or several books. Thus they never think of having a trading plan in the first place. As you already know, 90% of retail traders do not make money trading.
Some traders took a long time to learn to trade and are very careful in protecting their trading capital. A small number of these traders eventually matured into good traders as they put in place good habitual practices in their trading. These rare traders do not have a written plan per se, but their consistencies come from many years of slow and steady growth.
From my experience, it is those traders who are willing to look at their trading as objectively as possible, that means the writing and updating of their trading plans consistently, are the ones that can make it big. The reason is simple – not only do they work on fine tuning their ways in dealing with the market, they also fine tune the way they grow their trading business in a careful manner. As all decisions are done after careful thinking and deliberation, they know exactly what they want and how to get it over time.
As a summary, I will say those traders who have an honest trading plan developed for themselves have a much better chance to make trading their life long career.