Trading plan

Have you ever had the feeling that, despite all the strategies you have learned and all the things you know about trading, you still have no idea how to manage a trade once you have entered a market? And if so, does this make you feel a real sense of frustration?

At the start of my trading career, I felt stressed and anxious whenever a price approached my stop-loss. This often led me to reconsider my positions, which then led me to make the worst mistake a trader can make: moving the stop-loss further away.

I took a real step forward when I began focusing on the devastating effects my emotions had on my results. At first, although I was convinced I had a good strategy, I could not say with certainty that I was making a profit, and even less that I was being consistent over time. In practice, I made two big mistakes.

Beyond all the recommendations I read on the internet and in books (which I never translated into a method for me to follow), the first mistake was that I did not really understand how to deal with my emotions. The second mistake was the absence of a real, simple, clear, and most of all workable system for following my own trading plan.

Once I identified these two mistakes, everything became much easier. To control my emotions and significantly improve my results, I had to figure out exactly how to manage risk, instead of just repeating that it was something I needed to learn. I am now going to teach you a method to achieve this, so that over time you can become a profitable trader.

The first step, to contain risks, is to limit alternatives. You need to have an easy-to-understand plan, one made of simple “yes” or “no” rules. This will lead you to develop a trading plan that is easy to follow and that leaves no room for doubt, which is often rooted in emotional problems.

With a trading plan conceived in this way, you will have all the emotional and technical aspects of trading under your control, turning you into the executor of your trading plan.

This is the best way to become aware and consistent over time, turning you into a relaxed trader. You have to eliminate all your doubts from your trading plan; you must start from a recognisable and measurable element. Now, I will show you how to build a structure, a trading plan, that leaves no room for doubt or emotional problems.

Know thyself. Trading plans are never the same for everyone, as they change from person to person. Your risk appetite, for instance, will be different from mine. So, the first aspect you have to decide is the percentage of your capital to allocate to each trade. A percentage that will not cause any trouble to you or your trading account if you lose it.

Another thing you can define is the maximum number of trades open at the same time on each asset. For example, you can decide that at most, you will have three open trades on forex and two on spread trading with commodities. In this way, you create limits that will help you manage all your trades better and minimise the risk of getting into trouble or overtrading.

Finally, you need to establish the maximum bearable loss for each trade. You can see these three “steps” schematically in the flowchart below.

Set out your goals. Once you have determined the maximum loss for each trade, you have to do the same with the profit you want to make.

By doing this, you will eliminate most of the emotions surrounding a trade. This is because, before even opening a trade, you will know what part of your capital you are risking, how much you could lose in the worst-case scenario, and how much you may gain.

The next step is position management, as you can see schematically in the flowchart below.

At this point, you will already have decided where you wish to place your stop-loss and take profit. If they give you a risk/reward (R/R) of at least 1:1 (or the ratio you decided), then you can send the order on the platform; otherwise, you stay flat. In the next post, I will show you how to calculate the right position to open, based on your maximum loss and stop-loss.

Your trade will end when one of the two levels is reached: take profit or stop-loss. (If it ends prematurely, do not change the conditions that led you to open the trade in the first place.) If the trade concludes positively, you will record it in your journal (I will go into more detail about this later). If your trade reaches the stop-loss, you have to analyse whether you followed the plan correctly and, if not, understand the mistakes you made.

What you have seen so far is just a part of a trading plan. The other part is about the strategy you should employ. This too should have a few rules that are simple and clear to follow. These should always follow the same format: either yes, which leads you to go ahead, or no, which stops you from opening a trade.

Here is a very simple example of a strategy. You follow the trend, entering with an engulfing pattern after a retracement. You can see this simple strategy summarised in the flowchart below.

Of course, every single step of the strategy has to be clear; it must not cause any doubt. So, ultimately, you have to pay attention to every aspect, even the smallest details of your strategy and trading plan.

In this way, you will create a simple trading plan that will not cause the slightest doubt about what you need to do. A very clear structure: either yes or no. Therefore, it is up to you to put yourself in the ideal conditions for trading, by creating your own trading plan that is tailored to you and based on your personal risk appetite and strategies.

A plan that will not cause you stress or doubt every time you open a new trade. Calmness and tranquillity are fundamental, not only to creating a lasting and successful business but also to ensuring a good quality of life.

You will of course have to follow this plan with no exceptions, and thus with strict discipline. This is the only way to trade professionally, to have a profitable business, and most of all, to become consistent over time. It is the only way to reduce the number of individuals who waste their savings by doing what they think is a “game.”

Having a trading plan will make your trading much more comfortable. Think of it as your GPS (or compass) in the trading world. Enter your destination and follow the various steps necessary to reach it, testing various routes to find the best one.

Now, let me clarify something. The plan you saw above is just an example to make you understand how it should be developed. You have to create your own trading plan, based on your personal trading preferences and the conditions dictated by your strategy. You have to plan every aspect. In this way, no matter what happens, you will always know how to behave.

More generally, a trading plan should consist of a set of rules that define how and when you should place your trades:

• Market(s) on which you will trade (which instruments you will use, such as futures, currencies, commodities, options, etc.).
• Liquidity (your ability to execute an order quickly and effectively without causing a significant price change).
• Tightness: how narrow is the bid/ask spread?
• Depth: how deep is the market (how many orders are behind the best offer)?
• Immediacy: how fast can a large order be placed in the market?
• Resiliency: how long does it take for the market to recover after placing a large order?
• Execution: is the order filled at the desired price, or with a price difference compared to the order (slippage)?
• Volatility (the size and speed of price changes in a particular market).
• Position sizing rules (the dollar value of your trade can also be used to define the number of shares or contracts you will trade).
• Entry rules (conservative or aggressive).
• Trade filters (candles/bars, time, price, movement, stop order).
• Exit rules (profit targets, stop-loss, trailing stop, stop & reverse strategies).

So, what is the recipe for becoming a successful professional trader? A professional trader works hard, plans, tests and retests until he or she gets the desired results. You too can achieve success in trading by starting with a solid plan to follow in every situation.