A trading plan is a written document that helps traders maintain objectivity, and includes rules for entries, exits, and position sizing/risk management. Without some sort of rules to guide behavior, trades become random, and a random process is nearly impossible to improve upon.
With trading rules, we can monitor performance, and then make small incremental changes to the rules, if needed, in order to improve performance in a methodical way.
The most basic trading plan needs to include entry rules, exit rules, and position sizing/risk management.
Here are articles on each topic, so you can start to build your own trading plan.
I use a number of different entry strategies for trading.
When it comes to day trading, I mostly use price action.
For swing trading, and sometimes day trading (when applicable), I will also use price structures to signal entries.
I also use Renko charts for trending following. They can capture huge profits when the price runs.
There many ways to exit a position. We can exit via a stop loss, trailing stop loss, or target, or a combination of these.
Using Stop Losses and Where to Place Them covers the basics of trading with a stop loss, which manages our risk.
There are many different types of trailing stop losses, which is when we move the stop loss to lock in profit (or reduce the loss) as the price moves in our favor. The One-Bar Trailing Stop Loss is an example of a trailing stop loss. The Renko strategy discussed in the section above is also a form of trailing stop loss (and entry).
Setting profit targets is another way to exit trades. Profit targets were discussed in the Price Structure strategy mentioned in the section above. When dealing with profit targets, we also want to understand Reward:Risk and Win-Rate, as these essentially determine how much money we can make.
Position Sizing Methods
Position sizing is critical. Too big of a position size can bankrupt even the best trading strategy, and not risking enough can mean an amazing strategy sees dismal returns.
Three Effective Position Sizing Methods for Trading Forex covers some great methods on to take the perfect position size.
Additional elements of the trading plan may include:
Whether you hold positions through the weekend (or overnight) or not.
Whether you use a trade checklist to keep your trading on track.
Whether you use a daily routine to keep you focused on your goals.
And which currency pairs to trade in the first place.
By Cory Mitchell, CMT. Join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.