How do you create a trading plan

zenTrader

A trading plan is basically nothing more than a set of rules that you create yourself. Here you define your trading goals, entry and exit rules as well as risk and money management. Accordingly, you can use the trading plan as a useful tool to implement your trading strategies and to analyze your mistakes. Whether you are a beginner, intermediate or professional, creating a trading plan is essential to trading.

Since every trader is different and has their own individual trading style, there is no template for creating the perfect trading plan. However, there are a few factors and rules to consider.

Assessment of strengths and weaknesses

First principle in creating a trading plan - be honest with yourself! You create the trading plan for yourself and not for others, which is why you should also keep a trading diary at the same time. Assess your strengths and weaknesses in terms of trading as well as your character. List these in the journal. For example, it could look like this:

Strengthen:

  • I am very interested in what is happening on the stock exchange.
  • I enjoy further education.
  • I have ambition and want to be a successful trader.

Weaknesses:

  • If a position doesn't go in the desired direction, I get nervous.
  • I find it hard to deal with losses.
  • I am impatient at times.

From this it can be deduced that you have to define exact rules for entry and exit, which you then strictly adhere to. Don't underestimate your psyche. If you get nervous quickly and make wrong decisions as a result of this impulse, it can have fatal consequences. If you actually have a problem with not being able to deal with losses, ask yourself this question. If the Answer is that you do not have enough free cash, stay away from trading! Losses are part of everyday business. Even professionals suffer losses. However, they know how to deal with it. That is why it is so important to set up a set of rules and not blindly enter into trading.

Establishing the trading objectives

In the next step you define your personal trading goals. Write down your goals as precisely as possible, both in terms of profit and time frame. Set your goals for a day, a week, a month or half a year. Even if it seems absurd to you, you have to deal with your trading goals because from this you can derive your trading strategies.

At the same time, this gives you the opportunity to find out which trading style ultimately suits you and your goals. Would you like to trade short-term or long-term? Do you prefer defensive, offensive, conservative or speculative action? Decide on a trading style and stick with it for now. You still have the option to customize your trading plan later. In any case, avoid trying any trading concept without checking whether this concept fits your trading style at all.

Identification of suitable markets and trading hours

Study the markets and see which asset classes you already know about. This can be stocks, currencies, indices or commodities, for example. Pick a market that genuinely interests you and deepen your knowledge of it, especially in relation to the correlating factors influencing your chosen market. Remember that the more knowledge you acquire, the more useful you can get for trading.

It is also important that you know the trading hours of the selected market because as a trader you need to be able to act in a timely manner. You just have to be attentive to the respective core trading hours!

Creation of the trading system

With the creation of your own trading system, trading becomes almost an automatic process. It is important that the rule system guides you in all trading decisions. The trading system should contain the following:

  • Conditions: Define the criteria that must be present in a market in order to enter trading. Align your trading according to clear ideas, such as market-specific framework conditions, fundamental key figures or higher highs or lower lows.
  • Trigger: Determine the specific price constellations at which you want to enter or exit a market, for example when moving averages cross or when there is a new high or low.

Describe your trading system and rules as precisely as possible in your trading plan.

Risk and money management

The most important part of your trading plan is risk and money management. As this topic is very extensive, we will go into this in more detail in another article.

Logging of trading activities

By logging your trading activities, you get a very effective and efficient learning tool. Document all of your trading activities in detail in your trading diary. Write down why you succeeded or why you lost. This is the only way to continuously optimize your trading. There are now numerous free templates on the Internet that you can adopt and customize.

Once you have identified a trading system with entry and exit options, you should test it based on historical data. This is called a back test. The resulting report provides detailed information on how well the trading system you developed worked within a specified period in the past and whether the trading system would have withstood the market. You have the option of performing this backtest using a special backtesting module that many brokers offer free of charge. Alternatively, you can simply use a demo account for this.