Building a Trading Plan
We often emphasise that quality should be prioritised over quantity in all endeavours of life. The trading industry is a prime example. While there is an overwhelming abundance of material available, only a select few sources provide the necessary guidance. This is similar to the realm of psychology and self-growth, where countless books exist, but upon closer inspection, much of their content can be traced back to just two or three pivotal works written decades ago.
When we first embarked on our trading journey years ago, we lacked proper guidance. It was as if we were thrown into a vast jungle without a GPS, left to find our way out. Yes, there was an abundance of educational content even back then, but not all of it was useful. Information was scattered across the internet, making it a challenge to gather and digest the essential parts. The task of piecing together these fragments into something worthwhile and sustainable was overwhelming.
One of the most challenging aspects of the journey was building a trading plan that works. While various bits of information were available, there wasn’t a clear way to connect them. Some may argue that this process is inherently personal and should be developed individually. However, after years of experience and connecting the necessary dots, we have formulated a tailored technique for building a trading plan. By exploring this method and noting the key points, you can create the framework of your plan, both visually and technically ready for practical use.
A Step-by-step Guide
The first step before building a trading plan that works is to go through the phase of self-discovery and exploration. As a beginner, this means exploring various branches of the market, experimenting, developing an understanding, and gradually narrowing down what you want to achieve. For many, this involves logging into a trading platform like MT4, clicking through different securities, and opening and closing positions. On the technical side, it includes using different instruments and indicators to grasp the market’s logic.
Once this exploration is done, the process becomes more organised and systematic:
- Determine Your Risk Appetite: Understand your risk tolerance and identify the percentage of capital you’re willing to risk per trade (e.g., 1-1.5% per trade).
- Choose Financial Instruments: Select a few financial instruments to add to your watchlist. These will be the only ones you monitor, examine, and trade. Remember, quality over quantity is crucial.
- Identify Market Analysis Methodology: Choose the technical tools you will use for analysing the market and spotting trade setups. This includes timeframes, tools, and entry/exit criteria. If you’re not a technical trader, list other key elements to observe. The market is vast, and focusing on a select few tools helps establish balance and prevents overwhelm.
- Establish Routines: The most important part of your plan is creating routines. Decide on the following:
- When to conduct technical analysis
- How often to journal trade executions
- What to optimise and when
- The psychological principles you’ll follow
This approach ensures that your trading plan is structured, concise, and effective. Building a trading plan that works is not an easy task. However, if a correct approach is taken, the journey is much more facile and sustainable.
Trading Plan: Example Sample
Now, let’s use the same sample format to bring an example from our sole trading practices.
- Determining Your Risk Appetite: We follow the golden ratio of risking 1-1.5% of capital per trade. This allows us to expose only a small fraction of our total trading capital, ensuring that even if a trade goes against us, our long-term outlook remains intact. It’s like risking 1 egg out of 100 – understanding that the egg might break, but being rational and cautious means the remaining 99 are safe. This calculated approach provides peace of mind and avoids emotional reactions when trades don’t go as planned.
- Choosing Financial Instruments: After years of trading, we have narrowed our focus to three key instruments: EUR/USD, EUR/GBP, and USD/CHF. Monitoring and trading the same securities over time allows us to develop a deep understanding and intuition for their movements. This familiarity helps in making more accurate forecasts on how price might behave in the coming days or weeks. The principle of “less is more” applies here; rather than spreading ourselves thin across many instruments, we concentrate on these few to maximise our effectiveness.
- Identifying Market Analysis Methodology:
Timeframes:We work with two timeframes – the Weekly and the Daily. The Weekly helps us determine the overall trend and market direction, while the Daily allows us to fine-tune our game plans, manage trades, and enter positions.
Tools: Our technical analysis is minimalist, relying mainly on key zones, trend-lines (rarely), and the Fibonacci retracement tool. Our focus is understanding price structure, and these tools serve as supplements to our analysis, not the core.
Targets: While we don’t adhere to a rigid target policy, our typical risk-reward ratio is around 1:3 to 1:3.5. As swing traders, we act based on where we believe the price is headed.
Criteria: Our entry and exit criteria are flexible. We react to day-to-day price movements. For example, if we see price tapping into a marked liquidity region, we take action. If a reversal seems likely, we may close trades early. - Establishing Routines:
Journaling: At the end of every trading month, we log each trade in detail, noting technical specifics, outcomes, and key takeaways. This allows us to visualize past trades, extract lessons, and make necessary adjustments for future trades.
Psychology: Our success in trading is deeply linked to our daily routines and mental well-being. Trading is often referred to as a game of psychology, and this is true. Consistent profitability depends on discipline, patience, focus, and mindfulness. To support a healthy mental state, we incorporate practices like meditation, exercise, journaling, and setting self-imposed limitations.
Analysis: Trading should not involve sitting in front of a screen all day. As swing traders, we conduct two charting sessions per day—one in the morning and one in the evening. We assess market developments and map out the necessary actions for our trades. If the market is especially active, we add additional sessions for extra efficiency.
Optimising: Periodically, we take time to review and optimise our trading strategies and other operational plans. This ensures we are continuously improving and adapting to the evolving market landscape.
Acquiring the Template (by Investroy)
Both the step-by-step guide and the example sample are available in template format, tailored by the Investroy team. The first template, Building a Trading Plan, is designed to help you fill in the necessary details based on your personal preferences, such as risk tolerance, securities traded, and instruments. The second template, Example Sample, acts as a help guide and visually organises the details we highlighted in the third paragraph, where we discuss the specifics of the Investroy trading plan.
To obtain the template PDF, stay tuned for our upcoming announcement, which will include all the crucial details within the next week. To stay updated with the latest news, simply follow our social media platforms.
