One of the reasons new traders often make losses back to back is by trading without a plan. This guide will explain what a trading plan is, why you need one, and how to define parameters for your trading decisions.


This article at a glance:


  • A trading plan is a set of self-defined rules that guide your decisions when trading in financial markets.
  • A trading plan won’t guarantee positive results each time, but can help to achieve a degree of consistency by accounting for failure.
  • Creating and following a trading plan is important, but they aren’t immutable documents. They can and should be changed.


What is a trading plan?

A trading plan is a set of self-defined rules that guide your decisions when trading in financial markets. This roadmap tells you how to trade based on your own research and goals. With a trading plan in place, you’ll know exactly what securities you’re going to invest in, how much you’re going to invest, and when you’ll enter or exit positions.

Do you need a trading plan?

A trading plan won’t guarantee positive results each time, but can help to achieve a degree of consistency by accounting for failure.

In this case, failure can be defined as consistently closing positions with a loss. This happens because trading without a plan leads to a poor understanding of market dynamics, thus leading to sustained losses.

Everyone who wants to give themselves the best chance of trading successfully needs to have a trading plan, minimizing trading risks through structured decision-making.

How to build a trading plan?

However simple or complex your plan is, remember to factor in the following essentials:

Instruments

Through your own research, you need to decide whether you want to trade stocks, forex, indices, futures, commodities, or cryptos. You also need to decide whether you’re going to hold the underlying asset, or just trade its price movements using contracts for difference (CFDs).

Long or Short

Map out whether you would like to trade long positions, short positions or a mix of both. To understand these better, read our explainer or long and short positions in trading.

Entry and Exit Points

The amount you’re prepared to lose, or want to make from a trade, will be based on your own risk profile. It determines the limits you set on your order to cap losses (known as stop loss limit), as well as the profit level you would like to achieve before closing a trade (take profit limit).

Apart from these exit points, you should also be able to determine what price levels, or entry points, you would like to open a position at based on your analysis.

Capital

How much money are you going to set aside for trading? From this, how much are you going to allocate to each trade? Your trading bankroll should be a small portion of your overall trading pool, based on how much you are willing to lose if a trade doesn’t work out in your favor.

Portfolio Risk

This term refers to the sum of each investment’s risk. In other words, it is the total potential risk based on every investment in your portfolio. Some investments carry more risk of failure than others. By creating a balanced portfolio, this risk can be accounted for to lead to a net positive outcome.

You can do this through a process of diversification (investing in a diverse range of securities). More advanced traders can also use hedging as a way to mitigate risk. Hedging is where you take the opposite position on an asset you’ve already invested in to even out possible losses.

Leverage

Leverage is closely linked to CFD trading. Here, you can trade large volumes with a smaller capital commitment, where the rest is lent to you by your broker. To understand how this works, read our explainer on leverage.

The benefit of leverage is that it can help you get greater exposure to the market than you otherwise could have had.

The downside is that just as profits are magnified, so too are losses. This means a bad run can wipe out your bankroll faster.

Your Goal

The final consideration you need to make when you’re creating a trading plan is motivation. Everyone is aiming to make money, but what are your specific goals? Do you want constant payoffs with limited risk, or do you want to hold positions for larger payoffs – maybe to buy a house or as additional income? Your entire trading plan and risk appetite will revolve around these goals.

Creating and following a trading plan is important, but they aren’t immutable documents. They can and should be changed. Perhaps you’re risking too much. Perhaps the instruments you’ve chosen to trade aren’t performing well. A single loss is part of the trading cycle, but consistent ones tell you that your approach is not working. 

Track your outcomes and tweak your trading plan periodically to ensure that you’re working to an upgraded plan, rather than an obsolete one.


This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.