A trading plan expresses specifically how you will execute your trading system in real time with real money. Here are the 10 dynamics that go into creating a trading plan.
- Entry signal: What price action parameters or technical signals will cause you to enter a trade?
- How will exit your trade if it is a loser? Time stop, a technical indicator, or a stop loss?
- Where will your stop loss be placed? Where does price have to go to show you that the trade will probably not work out this time? Will your stop loss be entered as a hard stop, a mental stop, or an end of day stop? When will you exit if your trade is not moving in your favor?
- How big will your position size in this trade be? How much capital will you lose if your stop loss is triggered?
- How will you exit a winning trade? A price target, trailing stop, or technical indicator?
- At what price level would you be happy to take profits with no regrets, how much open profits are you willing to risk for a bigger win?
- How many trades do you want open at any one time? How much risk is there if all your stops are triggered at the same time?
- How correlated in movement are your trades?
- How do you know there is an edge in your entries? Backtesting, risk/reward dynamics, or chart studies?
- Can you execute your trading plan with discipline?