We’ve been talking, in general, about planning for success in your life and investments.
Now, I’m going to dig in even deeper today and give you precise details on how to create a trading plan.
It is absolutely vital that you have a trading plan fully in place before you begin trading. Otherwise you will fail.
I warn you as a friend and mentor that you should do this step before you risk a single penny in the market. I am here to bring you to profitability in your trading, and if you need any help at all, please leave a comment. Please share via social media or via email to help your friends as well.
Step 1: Make sure your plan fits in your life and purpose.
Why are you trading in the first place?
If you remember, in the previous article (creating your vision and your goals) I discussed that you needed to be clear about your core values. This concept is used again in your trading plan. Think back to your core values and remember the main reason you are trading.
Is it so you’ll have more time with your family?
Is it to save for your retirement?
Is it so that you have freedom to live life on your terms?
Is it for an additional stream of income?
Is it so that you can become a full-time trader?
These are some reasons and purposes for trading. Once you answer that question then you can begin to work on the next step.
I will give you an example of how I incorporate this concept into my plan:
For me, it’s really important to have as much time for my family as possible. So while I’m developing my trading plan, I must remember that the most important thing for me is to find a trading strategy that doesn’t take a lot of time to execute.
Priority number one is to find a long-term strategy that does not require me to make trades every single day. It is possible for me to have a return of 12 (or more) percent per year and only take an average of 1 long term trade per month?
Better yet, it is possible for me to return 12% in a quarter by simply hitting one big winner?
For example, right now I am currently short on the EUR/AUD (I have been short for several weeks) and I’m up about 5%. If I hit my target, I will make about 12 percent.
If I could do that every quarter, it will earn me a 48% return per year.
And here is where it gets powerful:
If I achieve that 48% return per year, every year I will be a wealthy man.
In fact, if I took $250,000 and made an average of 48% each year over the next ten years, my account would have $12,605,415.42
Not bad for a couple big trades per year.
Maybe you don’t have $250,000 right now.
But if you did the same exact concept and took just $5,000 and made 48% per year, you could be a millionaire in 14 years! With just 5,000 dollars!!
It is very possible for me to achieve 48% return with a few big winning trades each year. Again, it’s extremely important (because of my core values) to use a strategy that is long-term in nature.
Specifically, I want a long term strategy that will still generate a very high return on my investment.
A 48% return (even with a small beginning investment) will turn you into a millionaire over a short period of time, so I would definitely consider it a very high return.
Step 2: Build foundational strategy components.
Using the information that we learned in step 1 we will now outline the foundation for building our trading plan. If you build a solid foundation, you will have room to grow and build something strong that can last. That’s why we are taking so much time on the front end to build a good trading plan.
Here are some examples of the questions you need to find answers to:
How much time are you going to set aside for trading?
What time frame charts do you want to trade?
How much money do you have to invest?
What is your income goal or percent gain goal for this year of trading?
What Broker will you be using to invest with?
What are your current strengths in regards to trading skills?
What are your weaknesses when it comes to trading?
Will you be using fundamentals or technicals as your primary source for decision making?
Step 3: Build a trading strategy.
The trading strategy is an important part of your trading plan, but remember, it’s not the only part. Most traders just do this step; they simply create rules for their entry strategy and ignore the rest. If you follow all of the steps, you will be much more likely to be a profitable trader.
In an additional article coming up, I’m going to go in-depth on how to build a specific, profitable trading strategy. I just don’t have space in this article to include this component.
The strategy that you come up with does not have to be complicated or difficult. Actually, the simpler it is, the easier it will be for you to follow.
As a summary of what the strategy details will encompass, use the fundamentals we talked about in Step 2 to figure out what the following details will look like in your strategy:
Desired Risk to Reward
Take Profit Strategy
Stop Loss Strategy
Trade Management Strategy
In a trading strategy, there are many components that need to be thought out so that you have a complete strategy that is suitable for you to base your decisions on.
Step 4: Get experts in on this deal!
Once the trading plan is complete, it is time to get feedback and review. Everything in life is a process and it is critical that your trading plan goes through a process as well.
Once it is complete, it’s important to write inside the trading plan who you are going to get to look at your plan. You should find three proven and successful traders, approach them and ask them to give you feedback on your trading plan.
It is very easy today to get access to successful traders. All you have to do is go to trading forums or look on Twitter (or other popular trading websites) to find successful traders. You could even look locally for successful traders in your area.
Ask them if they would look at your plan and give you critical and accurate feedback. Ask them if they would share anything that doesn’t look right or that could be a mistake or that might not be profitable.
Having the additional feedback is an important step because, on your own, you might not see things clearly. You might have false perceptions or you might not be telling yourself the truth.
Once you’ve submitted your trading plan to 3 people, look at all of their reviews and then make adjustments and rewrite your plan. I think it’s important to rewrite your plan at least twice before you start trading.
This will help you really know your plan inside and out. It will help you go over the details and improve areas that need improving and to tweak it and make it as good as possible.
Step 5: Schedule a performance review.
It is critical that you schedule a review process right now and that you set up the date and time that you’re going to do your review.
What gets measured gets improved. If you don’t measure your success, you’re cannot be successful.
Here is how the review process should work:
You should have specific metrics that that will help you gauge performance.
Number one, you want to see if the trading plan was followed completely. This is more important even than the profitability level because if you cannot follow the plan you will never be profitable.
Then you want to look at the profitability metrics: How much money did you make? What was your win/loss rate? What was your risk versus your reward? What was the net gain?
You should also look to see if your strategy still fits your situation, your circumstances and your values. Is trading taking up too much of your time or do you want to spend more time trading?
Beyond the profitability metrics, you should ensure that your plan (and the way you executed the plan) is in line with your core values and your vision.
Continually re-evaluate yourself, your trading plan and your vision. Make sure that everything is in harmony and you will be well on your way to success in life and in trading.
Thank you for reading today’s article. Please share specific comments on the trading plan/process.
Do you think I have missed any key components of developing a solid plan?
Is there a specific question I can help you with to develop your own plan?
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