Creating a Trading Plan

Creating a Trading Plan

Originally posted on the AxiTrader website.

In his book ‘Pit Bull’, legendary Wall Street trader Martin Schwartz shared both the lowlights and the highlights of his stellar trading career. In his typical flamboyant fashion, he recalled how he lost $10,000 within a few hours of putting on his first trade.

But what’s outstanding about this book is how Schwartz openly discussed the trading mistakes he committed, particularly when he was a newbie trader. And he also shared how he learned and corrected those mistakes. And as they say, the rest is history as he became one of the most successful and famous traders in the world.

Schwartz’s book is a practical and realistic reference to the most common trading mistakes. And there’s no doubt that most traders – if not all – would have made or are making the same mistakes at one time or another.

Making trading mistakes is part of every trader’s journey. Whether you’re new to trading or even if you have been trading the markets for decades, chances are you will make some mistakes.

Some trading mistakes are more costly than others. And the fact is there are some mistakes that are hard to accept. And for some traders, ignoring a mistake and repeating it over and over again can spell the difference between becoming a successful trader or a losing one.

Most successful traders are happy to talk about their trading plans. Though they may not give you all their ‘trade secrets’, many are most likely keen to share their high-level strategy behind their trading success.

On the other hand, some traders dive into trading without any plan or preparation, only to find trading is not as easy or simple as they initially thought. The fact is, to be successful in trading you need to have a plan of attack.

Some of the items you can include in your trading plan are:

What market to trade – will you be trading Forex only? Will you be trading Commodities, Indices as well?
Your trading capital – how much money will you allocate to trading? Where are you getting this money? Is this part of your savings? Will you be borrowing money to start trading? How will you repay the money? Is it money you can afford to lose?
Your trading strategy – will you be a short-term trader -i.e. day or intra-day trader? Will you be trading over a medium-term or long-term – e.g. weekly trades?
Entry and exit strategy – once you have determined the market you want to trade, you need to identify the entry and exit levels you want to use even at a high level first. Identifying the entry and exit level may need a day-to-day review particularly for a fast-moving market like the Forex market. But the important thing to consider is to make it a part of your trading plan.
Proper and solid risk management strategy – What risk management and capital protection have you got in place? In terms of position sizing, how much will you allocate per trade? How much can you afford to risk per trade? Where will you place your stop loss? What is your strategy once you have entered a position – how often will you check it to make sure that it is moving in your favour or not? All these are critical considerations and should be part of your trading plan.

In the same book, Schwartz mentioned how he realised the importance of having a plan with specific goals and time frame. Even before he got his seat at the American Stock Exchange, Schwartz had been working on his overall plan – save up for a substantial trading capital, get a seat at the exchange and become a star trader.

As a trader, Schwartz developed a methodology that fit his personality. His trading plans are detailed enough to the level of what price to enter and where to exit a trade.

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