By Philip Moskie

A trading plan is the business plan for your trading business. It envisions the big picture of what you are trying to accomplish and then breaks it down to actionable tasks, rules and habits you must follow to be successful. Trading is like any worthwhile business and deserves a well thought out, written game plan if it has any hope of being successful. 

Table of Contents

• Introduction
• Why Have a written plan?
• Components of a Good Trading Plan
• How to Use Your Plan
• Key Points to Remember
• Conclusion

Introduction

When you start any business endeavor, one of the first and most important things you must do is to create a plan. Nowhere is this more important than in the business of trading stocks. 

For a plan to be effective, it must be simple, relatively short and it needs to be actionable. It must capture our big picture goal and then break that down into tasks, habits and rules. If your plan is full of “pie in the sky” slogans and mission statements, it will be a complete waste of your time. 

In this post we are going to show you how and why you should create a trading plan and then give you some tips and tools on how to use the plan to speed up your development toward making yourself a good, effective trader.  

Why have a Written Plan?

Let’s face it, it is always better to have a plan than not to have a plan. It is always better to have a written plan than just one formulated in your head. An effective plan defines what you intend to do and how you intend to do it. It then becomes your guide to help get you where you want to go. It also keeps you on track at times when you might start to deviate from your plan. Trading stocks is a game of mental discipline and we must use all available tools to help us stick to that discipline. 

If you really want to be a good trader and make money from the stock market, you must take this process seriously. Don’t treat this like a game. Make this written plan professional and something you show to anyone who is interested. Do not overcomplicate this process. Make it simple and precise. Be proud of it and keep developing it. The plan is never complete. 

Putting a plan down on paper memorializes it and makes it more real. It actually is the first step in taking thoughts from your head and turning them into something real. If you don’t actually write down your plan, the chances of accomplishing them becomes very small. Make your plan real by putting it down on paper to use on a daily basis. 

Components of A Good Trading Plan?

Part 1: Big Picture Trading game plan

• Define your why: you have to define the reason you are trading stocks. Is it to make a few hundred extra dollars a month to cover the cost of your new car? Is it to create a retirement plan? Is it to buy a new home? Capture your why and it will become your guiding force to becoming a successful, profitable trader. 
  
• Decide your trading type: we have written extensively on this in the past. Here is the link to our earlier post: LINK
  
• Goals/Objectives
  5 Year Goals: where do you want to be in your trading in the next 5 years. Be careful to make sure you focus on your trading here and not on your overall life. A life plan is good, but outside the scope of this post.
  Annual Goals/ Objectives: Annual goals and objectives should be created out of the 5-year goal.
  
• Training Objectives: if you follow my recommendations on how to become a good trader, training is going to be very important. The training I am talking about here is training using a trading simulator. I truly believe that the trading simulator is the single most important tool a trader has. If you believe, like I do, that trading is a skill, then training on the trading simulator is super important. 
  
  But what is the game plan for your paper trading? How long will you paper trade with the simulator until you go live in the market? How many trades does that look like? What time frame is that? Define it all and get it in your trading business plan. 
  
• Habits: what habits do you need to develop to become a good trader? Don’t underestimate the power of habits in making you a better trader. This includes your daily habits like watching the financial news, searching out new stocks etc. Start by making a list of your current habits. Ask yourself whether the habit makes you a better trader or a worse trader. Drop the habits that are hurting you and slowly improve your good habits over time. 
  
• Education Plan: Education should always be part of your plan. What else do you need to learn? What are you lacking? You must decide what information is important to your growth as a trader and create systems to make sure we get the information in an easily digestible form. 
  

Part 2: Individual Stock Trade Plan

• Rules: this is the heart of the plan. What are your trading rules? You must define the rules of your plan and stick to those rules. Rules are usually stated in terms of “what I will do” or “what I won’t do.”
  
• Stock Selection Criteria: Your stock selection criteria will be driven by your choice of the type of trading you are going to do. See our previous blog post on the subject here: LINK. List out your stock selection criteria and make sure you stick to it.
   
• % Profit Targets: what is your target percentage gain for each trade? Do you use the same target for every trade, or does the target vary? Is the target percentage reasonable yet a stretch to achieve? Defining this will allow you to make proper decisions based on the current market conditions we are in. 
   
• Trade Strategy Selection: define the stock trade strategy you are going to use on paper. Most traders cannot do this. It is important that you set it in stone. This doesn’t mean that it won’t change with time, but it needs a level of permanence that comes from putting it in writing.
  
• Stop Losses: when you trade like me and my students; you do not use stop losses. Many trading systems do insist on using stop losses so if yours does, then put it in the plan. What percentage are you going to stop yourself out?  If your trading plan includes the use of stop losses, then get it in the plan and stick to it. It is not the goal of this post to tell you how you should trade. It is the goal of this post to tell you how to put your plan together. 

How to use your plan

• Daily Review: for your plan to be of use to you, you must review it every day. Usually early in the day is the best. You should always compare your recent trading to your plan and realistically compare whether or not you are sticking to the letter of the plan.
  
• Hold yourself accountable: most people are just not good at doing this. Set up a reward/punishment system to give your accountability system some teeth. Do not let yourself take short cuts or let yourself off the hook. This is imperative to being successful.
  
• Get a good trading partner

Key points to remember

• The trading plan is the business plan for your trading business
• For a plan to be effective is must be in writing
• Define your big picture objective first
• Your individual stock trading plan defines how you will trade each stock
• Hold yourself accountable by getting a good trading partner

Conclusion

In this post we discussed the creation of your stock trading business plan. We discussed the importance of this document. We discussed what should go into the plan. Finally, we discussed how to use the plan. Use this post as a guide to help you build your plan. If you do, you will never regret putting in the time and effort.