MAKING A TRADING PLAN

Now that hopefully you see the importance of a trading plan, it’s time to
start making one. Though a proper trading plan can have anything you feel
should go in it, it should account for the following parameters:

Entering a trade.
Exiting a trade.
Stop placement.
Position sizing.
Money management parameters.
What to trade.
Trading time frames.
Back testing.
Performance review.
Risk vs. reward.

Each one of these things is a critical part of trading, but when combined
they become an invaluable and powerful trading tool. Other things
that are not so easy to pinpoint but should be taken into account are a
trader’s emotional makeup and his trading style. Each trader will have a
unique trading and risk style, which is why it is impossible to have a canned
trading plan that anyone can use. If a trading plan doesn’t fit your trading style and thoughts, you will have trouble following it no matter how good
it is, which means each trader should custom build his own. A good book
really can’t give you a trading plan that will work for you, but it can give
you guidelines to help make one that fits your trading style and risk tolerance.
Sure, many books will give you systems that work, but a system is
only part of a trading plan. And without money management it is useless.
Though this book leans more to trading with a game plan than a trading
plan, my first book will give you enough ideas to put together a solid trading
plan. But you still have to make it yourself.

As you start making a more elaborate and professional looking trading
plan you should go back to the idea of trying to convince someone to
give you money. In that case, people would want to know some basics like
what kind of returns are reasonable to expect? Does this include the trading
costs? How much can they lose at worst? Are there any unexpected
variables that can wipe you out? They’ll ask about your trading strategy,
which includes entry and exits; which markets, stocks, or sectors you will
trade; what will be your hold times; how will you use stops; did you back
test this system, and so on. They will also want to know about your money
management plan, which will tell them how much you will risk at once,
how you will prevent yourself from losing all of the money, how many markets
you will be trading, and so on. If you can answer these questions you
will be a much better trader than someone who can’t.