How to create a trading plan

In the tips for trading successfully course, we’re going to cover some simple techniques you can use to help take more from wins and cut down losses. Let’s kick off with a crucial tool that too many traders ignore: a trading plan.

• What is a trading plan?
• How to create a plan that works for you

What is a trading plan?

A trading plan is a written document that you create to govern your approach to the markets. It’s a rulebook you can stick to when the markets are at their most stressful, ensuring that you don’t lose your way and start trading erratically.

Many of the world’s most successful traders cite having a comprehensive plan as key to their achievements. But when starting out, most new traders ignore this step entirely – preferring to leap headfirst into the markets without proper preparation.

But it’s an unavoidable fact that most new traders fail to turn a profit, and many are then put off the markets for good. A trading plan is simply your best bet for bucking this trend and starting out on the right foot.

Luckily, creating a trading plan doesn’t have to be an arduous process. Follow the eight steps below and you’ll be all set.

How to create a plan that works for you

1. Assess your market knowledge

Trading is a journey and trying to run before you can walk is a recipe for disaster. So, the first step when creating a plan should always be to accurately evaluate your current expertise and strategise your trades from there.

If you’re a beginner, then diving straight into complex markets like options might not be the best idea. Instead, try to stick to what you know and include some goals to try out other markets once you’ve levelled up a bit.

2. Define your trading goals

Trading is all about goals. There’s the primary long-term goal – the core reason why you’re doing this in the first place – plus lots of little smaller goals along the way.

For example, you might have opened your City Index account because you want to earn a little bit of extra capital for retirement. That’s your primary goal. But you also want to experience the markets first hand, and of course you want to make some profits early on. These are both smaller goals that help you achieve your main target.

It’s best to plan all your goals ahead of time. Start out with the primary one, and set out a realistic timeframe for achieving it. Then decide on some milestones along the way that will help you achieve your core goal.

Also read our forex trading tips guide.

3. Plan your risk

As we’ve covered in the strategies and risk course, risk is inherent to the markets. So, how you deal with it is an essential part of your trading plan.

The first step here is to decide how much capital you’re going to commit to trading. Then, you’ll need to decide how much of that balance you’re comfortable risking on an individual position.

Say, for instance, that you start out with a balance of £15,000. Choose to risk 10% of that balance on each position, and you can only afford to make 10 unsuccessful trades before losing your entire £15,000. Lower that down to 2%, and you’ll have to make 50 losing trades to lose your balance.

Next, it’s time to decide your targeted risk-reward ratio. We’ll go into this in more detail later on, but essentially this dictates how much profit you’ll need to target to justify your risk from a trade.

Combine a ratio of 1-2 with our 2% strategy above, for example, and you’d be risking £300 on any given position – so you’d want to target £600 of profit.

4. Choose the markets you want to trade

There are countless markets to choose from when you start trading. With a City Index account, you get access to more than 13,500 of them.

But when you’re starting out, it’s often a better idea to stick to a few that you know well. Beginner FX traders might choose one or two major pairs, while index traders may select a couple of benchmark stock indices. That way, you don’t take on more than you can handle.

A key consideration is when you want to be trading. You’ll want to be able to be fully focussed on the markets – particularly if you’re day trading or scalping – with a clear head. Decide when in the day this might apply to you and pick your markets accordingly.

Finally here, you’ll want to research those markets as much as possible, and plan the ongoing research that you’ll do to stay ahead of them. If you’re trading the FTSE 100, for example, you might want to watch futures prices ahead of the open to get an early gauge of performance or set up alerts around major economic releases.

5. Set your entry rules

Now, you can set out the rules for which opportunities you’re going to trade.

Some of this should already be taken care of. You already know which markets you’re trading, when you’ll be active and the profit/risk you are expecting from each position. But you’ll still want to decide which parameters need to be fulfilled before you’ll open a trade.

Do you only trade once a major support/resistance line has been broken? Do you confirm each opportunity using MA crossovers and a stochastic oscillator?

We’ll go into this in more detail in the planning your entry lesson.

6. Set your exit rules

Just as important – if not even more important – than planning your entries into positions is deciding when you’re going to exit them.

It isn’t as simple as setting a stop at a nearby support or resistance level, then multiplying that by your risk-reward ratio to decide where to take profit. You’ll need to identify realistic exit points for both the winning and losing sides of each trade, and how you do that should be built in to your trading plan.

Much here will depend on your trading style. If you’re scalping, then you’ll be exiting trades as soon as the markets turn against you. Choose to swing trade, on the other hand, and you’ll need to try and predict when the current mini-trend might end.

Again, we’ll go into this in more detail in the deciding your exit lesson.

7. Analyse your performance

The final part of your trading plan is a space to record your activities as you go. The better your records, the more chance you have of learning from any mistakes and building on your successes.

Try to keep track of every single trade you make, whether winning or losing. Including:

• Why you entered the trade in the first place
• The overall market conditions (bearish, bullish, rangebound, volatile, calm, etc)
• Your emotions and mental state throughout
• Whether you closed it manually, or via an exit order
• If it made a profit, note down why it was successful and how much you made
• If it made a loss, try to understand why and record how much you lost

When you trade with City Index, you get access to Performance Analytics, which helps you analyse your previous positions. It’s a powerful tool, but it really comes into its own when combined with your own trading diary – so once you’ve made enough trades to get a decent sample size, dive in and see what edges you can uncover.

8. Adapt

Your trading plan doesn’t have to be set in stone, and adaptation is key to success. Market behaviours change over time, which means your plan should change too.

However, you’ll want to avoid making tweaks to your plan on the fly. When the markets are open, it’s best to stick to it as rigidly as possible. Once the markets are closed and you don’t have any active positions, you can look back over your trades and see whether your plan can be improved.

It’s a good idea to note down when you changed your plan in your trading diary, so you can track whether it helped your bottom line. If not, then revert to the old plan and see whether the issue was elsewhere all along.

Remember, trading is like operating a business. Keeping healthy records is essential to success, so you can avoid trading on hunches and instincts.