A trading plan is a roadmap that allows the trader to follow a strategy while optimizing it as they gain experience. It is a key tool for investing.
Traders have many technical analysis tools at their disposal that allow them to optimize their study of the assets that make up the financial markets. However, it can be difficult to organize the use of these tools in an optimal and consistent way, especially in the heat of the action. A trading plan is the best solution.
What is a trading plan ? What is a trading plan for ? How do you determine and organize a trading plan ?
Here is a summary of all the information you need to know to build a comprehensive and effective trading plan.
The trading plan is the trader's roadmap. Although trading plans are especially aimed at beginner investors who need a guide to get started in the markets, professional traders usually follow one as well. The trading plan details everything the trader needs to do before, during and after a trading session. It consists of a list of tasks that the trader has selected themself and that they can update regularly according to the results obtained. It is a unique plan specific to each investor according to their preferred markets, taste for risk and experience.
Trading strategies, money management techniques and risk management are all part of a trading plan. Trading plan allows the trader to ritualize and automate as many aspects as possible in order to provide discipline and optimize investment sessions. Moreover, this allows traders to avoid wasting time doubting or thinking about what to do in the middle of a session.
For traders, it is first necessary to define long-term objectives, whether to generate large profits over short periods, to automate income or to reach a certain capital. Traders identify the markets on which they will focus (many investors specialize in only one), such as currencies, indexes or commodities alongside the values of the markets they will trade (for example, the CAC40 or the EUR/USD on the Forex).
Finally, it is essential to determine your preferred trading style, depending on your personal profile. This could be scalping, day trading or swing trading, depending on your appetite for risk and objectives. Moreover, depending on your availability and the evolution of the volatility of the assets during the day, the chosen time unit is also important.
It is here that traders enter the strategy they will follow as well as their money management and risk management techniques. To determine the different levels of entry and exit of positions, most traders use chart analysis (support, resistance, chartist figures...) and technical indicators (Fibonacci, moving averages, pivot points...). In the case of a buy, they generally apply to enter above a support and exit below a resistance.
Conversely, in the case of a sell, the entry level is most often placed below resistance, and the exit level above support. The trader also determines the size of their positions, depending on the maximum loss they allow themself (for example a certain percentage of their capital) and the stop order level. The size of positions increases and decreases as the investor's capital increases.
Here, the trader should calculate the profit/loss ratio of their strategy, as well as their average profit per trade, in order to constantly monitor and optimize the strategy. They can also enter stress management tools, alongside books and trading courses they want to take.
A trading plan is a fundamental tool for the investor, allowing them to follow their trading strategy with consistency and assiduity, while improving it regularly for better performance in the future.