Stock market: why and how to make a trading plan?

 The creation of a trading plan and the respect of the trading plan is at the heart of the strategies of proprietary traders or individual traders. If the creation of a trading plan and the respect it seems to be a consensus, what is it exactly? How do you create a trading plan? For what reasons? With what key elements? Why should you never deviate from it?

Find all our explanations to create your own trading plan, adapted to your trading style and your investor profile.

What is a trading plan?

A trading plan, also sometimes called a speculation plan, is a sort of roadmap for your investments in the financial markets. The trading plan includes all the rules, objectives, and techniques that you have set for yourself. It is used to put in writing the decisions you will make for your trading. Therefore, it will allow you to always know where you are going while serving as a safeguard. The trading plan is to the trader what the business plan is to the entrepreneur. It details, in the form of a list, everything the trader wants to do and explains what means will be used to achieve these goals.

Of course, there are as many trading plans as there are traders. This one is specific to you. It takes into account your investor profile, including your risk profile, your trading style, your preferred financial markets, your short and long-term goals, your experience, the time you will have to devote to this activity, etc.

It can be handwritten or typed on the computer, displayed next to your screens or under a pile of paper in a drawer. It doesn't matter as long as you have taken the time to make it, have it well memorized, and don't hesitate to refer to it whenever it seems necessary.

What is the purpose of a trading plan?

To be successful, it is better to know where you are going and how you are going to get there. That's what a trading plan is for. It allows you to always know where you are going and how to get there. All you have to do is follow your trading plan step by step.

As such, the trading plan allows you to develop good habits and establish a reassuring trading routine that has been proven to be the best way to avoid losing your footing in the event of severe market turbulence.

The trading plan is the best tool to avoid reacting to market behavior by letting your emotions guide you, but rather by adopting a logical, clear response, already defined according to a precise process.

The trading plan also allows you to take a step back from your trades. By comparing your trading journal to your trading plan, it will be easy to identify positions where the trading plan has not been respected. Was the risk taken worth it? Was the position a loss or a gain? Why the discrepancy? Where is the error? Was the trading plan set too high? Not ambitious enough? Is it perfectly in line with my risk profile, my objectives, and the money management rules? Should it be changed? Or on the contrary, should it be left unchanged and never deviate from it in the future? The trading plan is a real source of reflection on how you trade and how to improve it.

Who should have a trading plan?

Every trader should have a trading plan, from the novice to the experienced trader. You should never take a position in the markets before you have a proper trading plan. This is the first thing that a beginner trader should do.

One might think that creating a trading plan is just a formality to be completed before trading in the markets and that creating a trading plan is an activity reserved for beginners. Not at all! While your investor profile will most likely not change with time and experience, your investment objectives and your trading universe may change. And you will have to rewrite your trading plan rather than keeping an old trading plan that is no longer relevant, multiplying the gaps under the pretext that your trading has evolved since then. This is the best way to break all the rules and run straight into disaster.

How to develop a trading plan?

Clarify your objectives

First, you need to ask yourself what your trading goals are. Why did you decide to become a proprietary trader? It is important to be very precise in your answers and to accompany them with a time frame as much as possible. For example, your answer could be to earn X extra euros of income per month within 6 months.

Choose your preferred market and financial products

You will then have to determine which markets you will choose (it can be only one market): the equity market (and in this case, which sector(s) of activity will you favor?), the currency market (and in this case, on which pair(s) will you concentrate?), stock market indexes (and if so, which one(s)?), commodities (and if so, which one(s)?), etc.

Be careful, when starting out, to stick to one market and one type of financial product: for example, the CAC 40 index or the shares of energy companies. Only when you have proven yourself on this market and this product will you be able to broaden your range and, for example, trade not only the euro-dollar pair but also the pound sterling-US dollar pair.

Determining your trading style

There are many different trading styles and, depending on your objectives, your risk aversion, the time you have to devote to trading, but also your tastes, your skills, and your interests, you can choose between scalping, this hyper-risky trading where the positions do not exceed a few minutes, but also day trading in which the trader keeps his positions for a maximum of one day or swing trading, also called trend trading, or even news trading, two forms of trading in which the position can be kept for longer than one day.

Defining your trading strategy

The next step is to determine your trading strategy very precisely. First of all, you will have to ask yourself about your trading: will you follow the trend or go against the trend?  Do you want to trade the rebounds? Which way will you open your position? Are you going to buy or sell?

Secondly, you will need to define what entry and exit rules will accompany each position. For the entry of the position, it could for example be the moment when the price rebounds after the previous breakout, after validation of a technical figure, when a signal is given by a technical indicator, or when you notice the breakout (upwards or downwards depending on your trading direction) of support or resistance.

To exit the position, the sell signal may again be given by the validation of a technical figure or a signal from a technical indicator, but you may also have to close your position either because your stop loss has been hit, or because you have reached the gains you had set.

Finally, it is important to remember that when you define your trading strategy, you should also write down the money management rules that you intend to follow in this part of your trading plan. This will include the use of a stop-loss order. Systematically using this market order to protect your positions is absolutely imperative. However, it is up to you to determine, when defining your trading strategy, where you will place it: at a predefined number of pips? At a threshold which, on the charts, seems important to you?

Establish a trading routine

Finally, your trading plan should also specify the trading routine you will follow. First, you'll need to determine how often you'll trade: Every day of the week? Every other day? Not including weekends? But also when exactly you will trade, i.e. at fixed times or not? If yes, from what time to what time? If not, what factors will you take into account to define your trading session (the release of a key indicator for example to start it?) Also, ask yourself what are the maximum losses per day beyond which you will stop trading.

Finally, you will also need to define what your monitoring and training routine will be to help you improve? How many hours will be devoted to training each week? Through which media? How much time will you spend each day monitoring the markets and reading the economic and financial news? How much time will you devote to reading charts each day that you are trading? How much time will you spend after the trade on your trading journal?

Trading plan: 3 good reasons to create this tool

There are many reasons why you should have a trading plan, whether you are a beginner or an experienced trader as we have seen before. Here are the three main reasons why you should create a trading plan if you haven't already done so.

Respect your investor profile

First of all, by creating a trading plan, you will define very precisely which markets and products you will trade, how often, over what period of time, with which entry and exit strategy, with which money management criteria, etc. In other words, at each stage of your trading plan, you will have to define exactly which market to follow, according to your investor profile and in particular your tastes and your interest in such or such market and such or such product but also your aversion to risk, your character, etc.

Discover all our analyses in our trading with IG section

Always know what to do, even in turbulent markets

By having a clear line of conduct to hold for each position with precise entry and exit rules (for example a right crossing on entry and a stop hit on exit), a clear routine (daily session from such and such an hour to such and such an hour maximum for example), keeping a trading diary to be compared, in case of failure, to your trading plan, you will have all the weapons to keep your composure in case of market turbulence and maintain a logical and reasoned approach rather than trading in reaction to the markets by letting your emotions overwhelm you

Putting all the odds on your side

Finally, having a trading plan is also and above all putting all the chances on your side to be successful. In fact, in theory, at least, your trading plan will allow you to avoid mistakes and multiply winning positions. Are you following your newly created trading plan to the letter, but losing positions? Maybe it needs to be revised. But keep in mind that even the best trading plan, under exceptional market circumstances, can be wrong. That doesn't mean you should write it off. The most important thing about a trading plan is to follow it!

All of our facts are, via way of means of nature, generic. It does not take into account your personal situation and in no way constitutes personalized recommendations for trading, nor does it constitute financial investment advice or an inducement to buy or sell financial instruments. The reader is solely responsible for the use of the information provided, without any recourse against  The publishing agency of being possible.  The publishing agency of cannot be held responsible for any error, omission, or inappropriate investment.

Any trading activity involves risks. The order execution service through a limited risk account presents a risk of loss of the invested capital.

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