Writing a trading plan

Decisions made while calm

Before a road trip, you pick where you're going, the route, when to stop for gas, and what to do if a tire goes flat. You don't figure it out at 70 miles an hour.

A trading plan is the same idea. It's one page that answers: what do I trade, when, how much, how do I get in and out, and when do I stop? You write it while you're calm, so you don't have to think when you're excited or scared.

Why only one page

A 20-page plan won't get read before each trade. One page fits next to your screen. Short plans get followed. Long plans get ignored.

The fill-in-the-blanks template

Copy this onto paper and fill in each line where the dots are.

1. My goal this year: ........ (Good: "Follow my plan on 50 practice trades." Not good: "Get rich.")
2. Market I trade: ........ (Start with just one: one stock, one fund or one micro futures contract.)
3. Timeframe: ........ (The candle size I use, like 5-minute or daily.)
4. When I trade: ........ (My hours, like "9:45 to 11:30 a.m. New York time.")
5. My setup: ........ (What has to be true on the chart before I even think about a trade.)
6. My entry: ........ (The exact thing that gets me in.)
7. My stop: ........ (The price where my idea is wrong and I get out.)
8. My target: ........ (Where I take profit, or how I exit a winner.)
9. Risk per trade: ........ dollars (Many careful traders risk 1% of the account or less.)
10. Max trades per day: ........
11. Daily loss limit: ........ dollars. When I hit it, I stop for the day.
12. Big stop rule: if my account drops ........ % from its highest point, I stop real trading and go back to practice.
13. I don't trade when: ........ (Big news, tired, angry, sick or in a hurry.)
14. After every trade I: write it in my journal.
15. Every week on ........ I: review my journal and my numbers.

An example, filled in

Here's how a made-up trader named Sam filled in some lines:

• Market: MES, the micro S&P 500 futures contract.
• Timeframe: 5-minute chart.
• Setup: Price is above the 20-period moving average and pulls back to touch it.
• Entry: A green candle closes back above the moving average.
• Stop: 1 point below the low of the pullback.
• Target: 2 times what I risked.
• Risk per trade: $25 on a $2,500 practice account (that's 1%).
• Daily loss limit: 2 losing trades or $50, whichever comes first.

See how specific that is? "Buy when it looks strong" is not a setup. Sam's setup is clear enough that somebody else could read it and take the exact same trades.

The friend test

Hand your plan to a friend and show them a chart. Can they point to where you'd enter, where your stop goes and how big the trade is? If they have to ask "what does 'strong' mean?", rewrite that line until they don't.

Plans change, slowly

Your plan isn't carved in stone. But you only change it on review day, after looking at your journal and your numbers. Never in the middle of a trade. And change one thing at a time, so you can tell what that change actually did.

Remember

• A trading plan is one page of decisions you make while calm.
• It covers what, when, how much, how you get in and out, and when you stop.
• Every line should be clear enough that a friend could follow it.
• Change the plan on review day, one thing at a time, never mid-trade.