Developing a trading plan

Setting your trading goals is one of the most important steps in developing a trading plan.

Your trading plan is a tool that you shape to suit your personal trading style. You can include anything that you find useful, but working through the following steps should provide all the essentials you need.

You should use a trading diary to record your thoughts and progress, as well as adding notes and charts every time you open, close or amend a position.

1. Know yourself as a trader

First and foremost, you should be able to complete this sentence: ‘I want to be a successful trader because…’

Secondly, you should honestly assess your strengths and weaknesses, with regards to trading specifically, but also any personal traits that might influence your trading.

2. Define and understand your trading goals

Setting your trading goals is one of the most important steps in developing a trading plan. It is also the step that most people neglect.

You should try and be as specific with your goals as possible, both in terms of profit and timeframe. Only by defining and quantifying your goals will you be able to measure how far you’ve achieved them.

Most trading plans suggest you identify detailed trading goals on a daily, weekly, monthly, six-monthly, annual and lifetime basis.

It may strike you as silly or impossible to come up with daily trading goals, or pointless to try and settle on a lifetime trading objective. But, more than the actual outcome, it is the thinking that goes into these goals that is important and ultimately beneficial.

3. Decide what types of trading you are interested in

You have several options available to you when you are considering trading on financial markets. Some people prefer to stick to a single trading method, others have successfully incorporated different trading types into the same plan.

Whatever route you decide to take, the most important thing is that you understand your options beforehand and make a decision, as part of your trading plan, to stick to a particular system.

Of course you can adapt your trading plan as you develop as a trader, but what you want to avoid is trying out a new type of trading on a whim without doing the research to see if it suits your trading style.

4. Identify your markets and trading timeframes

As well as knowing which trading types you are interested in, you should also identify the markets that you are best suited to.

One prime consideration is your level of knowledge on particular markets (be it company shares, commodities, indices, foreign exchange) and the factors that drive them. The more you know, and the more you are interested in the subject, the greater care you will be able to take.

Similarly, you should consider when these markets are open and whether you will be able to offer them the proper attention at important trading times.

5. Establish your personal trading system

A trading system will apply a series of rules to make trading into an almost automatic process. You’ll need to decide whether you would prefer your trading to be mechanical, where you pick a trading system and let it guide all your trading decisions; or discretionary, where you make decisions on a case-by-case basis.

If you decide to use a trading system, it should include:

Set ups — the conditions you look for in a market that you think give you a high probability of a successful trade. It can be useful to have a clear idea of the set-ups on which you like to trade – such as following higher highs, lower lows or moving averages.

Trigger points — the precise moments that you want to trade on – such as a market moving through a new high or low.

Risk management is possibly the most important aspect of your trading plan.

6. Know what you are willing to risk

Risk Management is possibly the most important aspect of your trading plan. Techniques for managing your risk certainly play an integral part in any trading plan. A Risk Management calculator like the one shown here is a useful tool for quickly calculating and managing your potential risks.

From a trading plan perspective, it is important that you consider your money and risk management rules, establish them to suit your trading style, and stick to them through good and bad trading times.

Good questions include:

  • What proportion of my account am I prepared to risk on each trade?
  • How many positions am I prepared to run at any one time?
  • What is the maximum account exposure I am prepared to accept?

7. Decide how you want to manage your open trades

This aspect of the trading plan deals with your handling of your open positions. This is when you can be most subject to emotional responses – you see the market drop, and you want to cut your losses, or the market spikes and you feel tempted to hold your position even longer.

In these emotionally charged situations it is essential to already have a strategy in place that you can call on.

8. Know how you plan to keep records of your trading

It’s amazing how often people neglect this aspect of the trading plan, especially as it can be such a vital learning tool. If you regularly update a document of all your previous trades, including various details that made them successful or not, you can only learn from these in the future.

A simple spreadsheet is all the record you need to keep, but a comments section is particularly useful. Include everything from how well you stuck to your strategy, and what worked and what didn’t, to how you felt on the day or at the time.

You may be pleasantly surprised at how easy it is to identify successful trends and then repeat them in future trades.

9. Test your system

You can back-test the system you have chosen against historical data, to establish whether it would have held up against recent market movements. You can do this manually, or there are various facilities set up by certain financial services providers to do it for you.

Another testing option, offered by some financial services providers, is a demo account. Depending on the provider and your preferred means of trading, you can actually set up an account with imaginary funds and implement your trading strategy for a limited time to test its viability.

A demo account lets you put your strategy into practice with imaginary funds.


I have recognized that Trading is one of the most challenging and rewarding professions on earth. I welcome the challenge, and through: education, consistency & persistence, a specific trading plan, proper mindset and the right tools, I will overcome the challenges and succeed and prosper in the financial trading arena.