Almost all of the successful traders and investors agree on one thing, and that is the need for a trading plan.  Most people trading the markets have no such plan, and just enter and exit trades on whims, and ever changing rules.  Emotion often dictates the course of action for traders with no plan, and losses mount as they regularly sell at the bottom and buy at the top.  By creating a trading plan for yourself, you can instill enough self discipline to take most of the emotion out of your own trades.

Trading plans are not difficult to create.  It can be as formal or as informal as you like, but should include some of the following simple details , according to Bill Kraft’s book Trade your way to Wealth. Bill specifically mentions these components of a successful trading plan.  You can adapt the list below to your liking, knowing that any plan at all is better then no plan.

  • Will I trade full time or part time?
  • How much risk money will I allow in my trading account? (maximum amount to lose)
  • How much risk money will I allow for any single trade?
  • What are my business hours?  - earmark specific time to allow for trading, research, and studying, and then abide by the rules you set as if you were working for someone else.
  • What strategies will I employ? - short term trading, day trading, earnings cycles, covered calls, LEAP’s, spreads…
  • When will I make my trading decisions?
  • What is the maximum number of trades to have in place at one time?
  • How will I make my trading decisions?
  • Defined rules for entry and exit? - are you always entering at support and exiting at resistance?  Or are you playing off some other technical indicators?  Or just time? (only hold for 3 weeks, etc)  Maximum loss, Maximum gain.
  • What indicators will I use?
  • What types of orders will I use?
  • What are your expectations of each trade?

When creating a trading plan, remember that it can be a living document.  Start with what you know now, and add to it or modify it when you need to.  Also note that trading plans are useful for long term investors as well, and can include similar key components.