10 Steps to Building a Winning Trading Plan

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10 Steps to Building a Winning Trading Plan

In business, it is said that if you fail to plan, you plan to fail. It may seem flippant, but everyone serious about achievement, even traders, should adhere to those phrases as if they were engraved in stone. Ask any trader who consistently earns money, and they will most likely tell you that you have two options: 1) stick to a documented strategy meticulously, or 2) fail.

Congratulations, you are in the minority if you already have a documented trading or investing strategy. It takes time, effort, and study to build a financial market technique or methodology that succeeds. While there are no guarantees of success, you have removed one big impediment by developing a clear trading strategy.

Key Takeaways

  • Having a strategy is critical for trading success.
  • A trading strategy should be put in stone, but it should be reevaluated and altered as market circumstances change.
  • A good trading strategy takes into account the trader’s personality and aims.
  • It is just as crucial to know when to quit a trade as it is to know when to join the position.
  • To establish particular exit points for each trade, stop-loss prices and profit objectives should be incorporated to the trading strategy.

If your strategy employs incorrect approaches or lacks preparation, success will not arrive quickly, but you will be able to track and adjust your route. Documenting the process teaches you what works and how to avoid the expensive errors that inexperienced traders often make. Whether or not you have a strategy in place, here are some suggestions to get you started.

Disaster Avoidance 101

Trading is a business, and you must handle it as such if you want to be successful. Reading a few books, purchasing a charting software, establishing a brokerage account, and beginning to trade with real money is not a business strategy; rather, it is a formula for catastrophe.

While trading, a strategy should be prepared with unambiguous signals that are not susceptible to change, but should be reevaluated after the markets shut. The strategy may vary as market circumstances change and as the trader’s skill level increases. Each trader should develop their own strategy, taking into consideration their particular trading styles and objectives. Using someone else’s trading strategy does not represent your trading personality.

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Building the Perfect Master Plan

Because no two traders are the same, no two trading strategies are the same. Each strategy will take into account essential criteria such as trading style and risk tolerance. What are the other necessary components of a successful trading strategy? Here are some things that any plan should have:

1. Skill Assessment

Are you ready to make a trade? Have you paper traded your strategy and are you certain that it will function in a real trading environment? Can you act on your cues without hesitation? Market trading is a game of give and take. The true professionals are prepared and benefit from the rest of the crowd, which, in the absence of a strategy, often gives money away after expensive blunders.

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2. Mental Preparation

What are your thoughts? Have you had enough sleep? Do you believe you’re up to the task ahead? Take the day off if you are not emotionally and mentally prepared to compete in the market; otherwise, you risk losing your shirt. If you are furious, busy, or otherwise distracted from the activity at hand, this is virtually certain to happen.

Many traders have a market mantra that they repeat to themselves before the day starts to get them prepared. Make one that will place you in the trade zone. Furthermore, your trade space should be clear of distractions. Keep in mind that this is a company, and distractions may be expensive.

3. Set Risk Level

How much of your wealth should you put at risk in a single trade? This will be determined by your trading strategy and risk tolerance. The level of risk varies, but on any given trading day, it should be between 1% and 5% of your portfolio. That means you get out of the market and remain out if you lose that much at any time throughout the day. If things aren’t going your way, it’s best to take a rest and battle again another day.

4. Set Goals

Set reasonable profit objectives and risk/reward ratios before entering a transaction. What is the smallest amount of risk/reward you will accept? Many traders will not enter a transaction until the potential reward exceeds the risk by at least three times. For example, if your stop loss is $1 per share, your profit target should be $3 per share. Set weekly, monthly, and yearly profit targets in dollars or as a percentage of your portfolio, and review them on a regular basis.

5. Do Your Homework

Do you monitor what’s going on in the globe before the market opens? Are global markets rising or falling? Are S&P 500 index futures higher or lower in pre-market? Because futures contracts trade all hours of the day and night, index futures are a fantastic tool to gauge the mood before the market opens.

When and what economic or earnings statistics will be released? Place a list in front of you and determine if you wish to trade ahead of an important report. Most traders believe that waiting until the report is out is preferable than accepting additional risks connected with trading amid turbulent responses to reports. Pros make decisions based on probability. They don’t partake in gambling. Trading before of a major news is sometimes a risk since it is hard to predict how markets will respond.

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6. Trade Preparation

Label major and minor support and resistance levels on the charts, establish alerts for entry and exit signals, and make sure all signals can be readily seen or recognized with a clear visual or audible signal, regardless of trading system or software you use.

7. Set Exit Rules

Most traders make the mistake of focusing their efforts primarily on seeking for buy signals while paying little attention to when and when to exit. Many traders are unable to sell when the market is down because they do not want to accept a loss. You’ll never make it as a trader until you get over it and learn to take losses. If your stop is hit, it signifies you were incorrect. Take nothing personally. Professional traders lose more transactions than they win, yet they still earn money by managing their money and minimising their losses.

You should know your exits before you undertake a deal. Every deal has at least two viable exits. First, what is your stop loss if the transaction fails? It must be documented. Mental pauses do not count. Second, set a profit objective for each transaction. Once there, sell a part of your position and, if desired, adjust your stop loss on the remainder of your position to the breakeven point.

8. Set Entry Rules

This follows the advice on exit rules for a reason: exits are significantly more essential than entrances. “If signal A fires and there is a minimum goal at least three times as large as my stop loss and we are at support, then buy X contracts or shares here,” a typical entry rule may say.

Your system should be complex enough to be effective while being simple enough to allow for quick judgments. If you have 20 requirements that must be satisfied, many of which are subjective, making transactions will be tough (if not impossible). In reality, computers are typically better traders than humans, which may explain why computer programs currently produce the majority of transactions on major stock exchanges.

Computers do not need to think or feel good in order to make a deal. They enter if certain requirements are satisfied. They leave when the deal goes poorly or reaches a profit objective. They don’t get upset at the market or believe they’re invincible after a few successful transactions. Each choice is based on probability rather than emotion.

9.Keep Excellent Records

Many seasoned and successful dealers are also great record keepers. If they win a transaction, they want to know why and how they won. More importantly, people want to know the same thing when they lose so they don’t make the same errors again. Details such as goals, the entrance and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and remarks about why you made the trade, as well as the lessons gained, should be written down.

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You should also keep track of your trading records so that you can go back and assess the profit or loss for a certain system, drawdowns (amounts lost each transaction employing a trading system), average time per trade (which is required to determine trade efficiency), and other critical elements. Compare these elements to a buy-and-hold approach. Keep in mind that this is a company, and you are the accountant. You want your company to be as lucrative and successful as possible.


According to a 2017 research titled “Do Day Traders Rationally Learn About Their Abilities” by Barber, Lee, Liu, Odean, and Zhang, the proportion of day traders who leave within two years.

10. Analyze Performance

After each trading day, understanding the why and how is more important than knowing the profit or loss. Make a note of your findings in your trade notebook so you can refer to them later. Remember that lost trades will always exist. What you desire is a long-term winning trading strategy.

The Bottom Line

Successful practice trading does not ensure success when you start trading with real money. That is when emotions enter the picture. However, effective practice trading instills trust in the trader’s system if the system produces favorable outcomes in a practice setting. Choosing a method is less crucial than developing the ability to make trades without second-guessing or questioning the choice. Confidence is essential.

There is no way to ensure that a deal will be profitable. The trader’s chances are determined by their competence and winning and losing strategy. There is no such thing as a victory without a loss. Professional traders understand that the chances are in their favor before entering a deal; otherwise, they would not be there. A trader may lose some battles by letting gains ride and keeping losses short, but they will win the war. The majority of traders and investors do the opposite, which is why they do not regularly earn money.

Traders that regularly win approach trading as a business. While there is no assurance of profit, having a strategy is essential if you want to be consistently successful and thrive in the trading game.

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