How to Create a Trading Plan That's Right for You
Whether you're new to trading or have years of experience to fall back on, operating with a clear strategy is central to your chances of success. It's not a venture that should be entered into lightly, because a lack of direction is likely to lead to clouded decision-making and mixed results.
So, you need to create a trading plan that you're comfortable and familiar with. There should still be some flexibility built in as you seek to capitalise on any sudden or unexpected market fluctuations. But having that strategic framework can help you work with a level of clarity and consistency that should prove beneficial.
However, understanding the theory and executing it in practice are two different things. Read on to find out more from FXCM's guide on how to create a trading plan that works for you.
Trading plans: what are they?
A trading plan allows you to formalise the methods you're going to use in identifying opportunities and executing trades. Most experienced traders would advise against making any investments until you have a robust strategy in place, so creating a trading plan represents an essential formative step in your journey.
Plans are typically laid out in the form of a written document, giving you a tangible resource you can refer to in times of uncertainty. It can be tweaked and improved – especially if it's not leading to profitable trades – but hopping between multiple plans may only serve to muddle your thinking.
Do I need to create a trading plan?
In short, yes. Almost all traders would recommend it as best practice. The way you set out your strategy may differ from someone else's way of working, but creating a trading plan offers plenty of benefits. It enables you to:
- Set clearly defined goals and expectations
- Avoid emotional trades that are against your better judgement
- Reinforce your trading parameters
- Make clear decisions based on experience and past performance
- Learn from mistakes and adapt if the plan is not delivering the desired results.
Creating a trading plan: the essentials
Understanding the theoretical advantages of creating a trading plan is one thing. But you need to know how to implement the various elements in practical terms. Here, we'll take you through the essential components you need to consider.
How much do you already know?
The first step is to be honest about your level of knowledge. If you're a novice, it makes sense to first get to grips with the basics of trading. Once you've built up your understanding of the fundamental markets and instruments, you can begin to create your trading plan in accordance with what you've learned.
If you're coming in with greater experience, you should be able to harness that existing knowledge to put together a strategy that enables you to deal in more complex markets.
What are your goals and targets?
A key element of creating your trading plan is having clearly defined objectives. Your idea of success may look very different to another trader's, so these goals must be specific to you. For example, if you're a beginner, your early ambitions might centre on building up your experience and understanding of the markets before putting a numerical value on the targets you'd like to achieve.
Beyond that stage, you should introduce measurable objectives. You could build periodic profit goals into your plan so you have an aim for every day, week, month, quarter and year. These could be set as a percentage of your portfolio or in monetary terms.
How much time and capital do you have?
Your plan needs to factor in the amount of time you'll be able to devote to trading. Is it going to be possible for you to execute trades while you're at work, for example? Or will you be reliant on managing your portfolio during the mornings and evenings, when you might have other commitments to juggle?
You should also factor in all the research you'll need to do. Your trading style may determine how much time you need to set aside. Day trading will place a greater demand on your time, whereas position trading does not require such intensive monitoring of the markets.
It might be that you have plenty of time to create your trading plan and execute it. But that will be almost impossible without knowing how much capital you can invest. There are no guarantees when it comes to trading, so you must never risk an amount you can't afford to lose. Set clear boundaries and always operate within those.
What style of trading is right for you?
There are lots of different strategies for you to consider. So, you need to take the time to understand them in order to decide which is going to be most suitable when creating your trading plan. Below is a brief rundown of some of the most common styles and how they work:
- Scalping: Placing multiple trades every day for a very short period to try to accumulate lots of small profits.
- Day trading: Opening and closing a position on the same day.
- Range trading: Predicting market movements within defined upper and lower limits.
- Trend trading: Identifying movements through in-depth, comprehensive research and technical analysis.
Knowing your risk-reward ratio
Risk is an inherent part of trading, so you need to factor it into your plan. The ratio you choose will depend on your appetite for risk, but it needs to tie in with the amount of capital you have at your disposal. Your risk-reward ratio is all about how much you stand to gain from a successful trade. For example, an investment of £100 for a potential profit of £500 equals a ratio of 1:5. You may prefer to operate within a lower risk-reward ratio while you get a feel for the markets, or you may decide to take on more risk with the aim of earning a greater profit. Making that choice is a key aspect of creating your trading plan.
Choosing the right markets
Creating a trading plan for the forex market will look very different to creating one for shares, indices or commodities. Each has its own characteristics and idiosyncrasies; you need to be familiar with these to suitably shape your strategy. The various markets include:
- Forex: Also known as foreign exchange, forex is the buying and selling of currency. It is the world's largest and most liquid market.
- Shares: Acquiring a stake in a business or using derivatives to speculate on its future price without taking ownership of the asset.
- Indices: Predicting the performance of a group of assets within a specific exchange without having to take up multiple positions.
- Commodities: Speculating on the future price of physical assets such as metals, energy, livestock and agricultural products.
Set your entry and exit rules
Creating a trading plan is all about establishing a robust framework that helps you make decisions based on data and analysis rather than emotion or instinct. That is especially important when it comes to fixing your entry and exit points – because you can use programs that will automatically open or close a position for you based on the conditions you've set. These could be triggered once the price of an asset reaches a certain resistance or support level, for example.
And identifying your exit point is arguably more important than setting your entry because you will need to establish at least two exits – one in the event of a profitable trade and one in case the markets move against you.
Analyse, assess and refine
Once you've created a trading plan and started to put the theory into practice, there's still work for you to do. To make the most of your strategy, you need to keep a detailed diary of every trade you execute. This will allow you to conduct a periodic review of your progress and make any necessary changes.
Ask yourself what worked well, what didn't, and identify any instances where you moved away from the plan you set out. If you did, what were the results? If they were positive, perhaps you could look to incorporate more of those trades in future. If they were negative, they provide an opportunity for you to learn and either adapt your approach or move away from it altogether. Knowing how to create a successful trading plan means being open to constantly improving it so you can make the most of your portfolio.
How to put your trading plan into action
Partner with leading broker FXCM to implement your trading strategy. We can offer access to forex pairs, commodities, shares and indices – and if you want to put your plan to the test you can try our demo account to gain some experience before entering the markets for real.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.