How to create a trading plan

A trading plan is an essential part of a successful trader’s toolkit. Regardless of your trading routine and how often you trade, you should think of it like a business – you’re investing time and money, after all. And just like any business venture, a thorough plan is integral to success.

Your trading plan will be like a business plan, giving a framework for the decisions you make. Having your plan in place doesn’t guarantee success – far from it. But what it will do is help you to trade logically, and to understand how to handle both positive and negative outcomes. This will help you to develop as a trader.

Why do you need a trading plan?

Trading certainly isn’t easy. No one can ever be sure how the markets are going to move on any given day. Successful traders approach trading as a lifelong journey, where there are always lessons to be learned. Inevitably, this involves making mistakes as well.

Without a doubt, trading is psychologically taxing. Your trading plan will be useful in all situations, but even more so during the difficult moments of your trading career. When nothing seems to be going your way, your plan becomes essential to the actions you take. Think of it as your contract with yourself: your plan will keep you on track, make you focus, help you avoid hindsight bias, and keep you aiming for your long-term goals.

Steps to making a trading plan

To help you make your trading plan, we have put together some of the essential details and thought processes that should go into its creation. As with anything in trading, there are various opinions about what is and isn’t essential. Remember, it’s your trading plan. You should carefully consider each of the following points, but at the end of the process, your plan probably won’t be identical to anyone else’s. 

Here’s how to create a trading plan:

Define your reasons for trading

It’s not good enough to simply say you want to make money. You need to put plenty of thought into your reasons for trading. Dig deep – think about why you want to make money. Do you want to buy something like a new car? Do you want to spend money on your family? Perhaps you want to retire?

Whatever it might be, document it in your trading plan. Needs and motivations can change, but don’t worry, you can alter your plan in future if need be. The important thing is to look deep within your character and answer honestly, so that you have a personal motivation for putting your trading plan together.

Set your goals 

Once you have established the big picture and understand your motivation, it’s time to break this down into smaller, time-based goals. Many situations in trading mirror those in life; it’s all too easy for your biggest dreams and ambitions to remain unfulfilled.

This is how you can go about breaking your goals down:

  1. Set your crazy, big, passionate, lifechanging goal. This should be informed by your reasons for trading and it can be anything you want it to be – this is where you get to think big. After this, you can start being practical and breaking your plan down into achievable steps.

  2. Set your six-month goal. Think about where you need to be in order to achieve your big goal. You might need to spread this out over many years, which is fine too. Make sure your plan works for you.

  3. Set your monthly goal. Once you know your six-month goal, you can have a better idea of how this will break down into monthly goals.

  4. Finally, set your weekly and daily goals. Align these with your other goals and consider how you will adopt good daily habits to help you achieve your aims.

Remember that there are always setbacks. This is your preferred route to take, not the only one that is open to you. Dream big, but remain realistic at the same time and don’t beat yourself up if you take a detour. Be careful about time frames too, as dreams can take a while to achieve. Trading is a lifelong journey after all.

Establish risk management principles

You need to have a risk management plan for every trade, and it’s essential you follow the rules you set for yourself.

Break it down like this:

  • The rule of thumb is never to risk more than 2-3% of your capital per trade. This makes sense both financially and psychologically. Financially, you are much more likely to recover smaller losses. If you lost 25% on a trade, you’d have to make a 33% gain on your next trade to get back to even. Psychologically, smaller losses are easier to deal with too. Imagine how it would feel to lose 25% of your capital on two trades in a row.

  • Set a daily loss limit. When you reach this limit, simply walk away. 10% is often the recommended maximum limit, but you should set an amount that is right for you. The important part is to stick to it.

  • Define profit limits too. Greed can be destructive, and you need to get out of trades at the right time. Lock in your profits on a per trade and a daily basis.

  • Define profit and loss parameters on your account as a whole. At what point do you step away and reassess your trading? At what point do you pull money out of your trading account? Make sure this is all pre-planned.

Here’s an example. Imagine you start out with $5,000. You may put in your plan that you will stop trading and reassess if your account drops to $4,000 in value.

Conversely, you may decide that if you grow your account to $7,500 from $5,000, you will withdraw $1,000 and attempt to grow the remaining $6,500. This is an important step as it makes your trading gains real and tangible.

While risk management should certainly feed into your trading plan, it’s also good practice to have a complete risk management plan. This will allow you to define your overall approach to risk in more depth and set your own strategies. Find out how to manage your risk in full.

Establish a trading routine

Successful trading is driven by consistency, in behavior, attitude, and discipline. If you’re not trading professionally, chances are you have a lot of other commitments, so you need to build it into your daily routine.

You can be as specific as you like with this. You might decide that you will trade between 6 a.m. and 8 a.m. Once you’ve decided this, be more specific. Will you have a cup of coffee first? Will you shower beforehand? Will you start by analyzing longer-term charts, before looking for shorter-term opportunities?

You don’t have to trade every day. If you’re feeling unwell or distracted, don’t trade. The markets will be there tomorrow. The important thing is that when you’re trading, you need to have a consistent and focused approach.

Decide how to track your trades

Tracking your trades doesn’t have to be complex, but you do need to do it. Whether you use a spreadsheet or a ring binder, the outcome will be the same – the important part is that you are doing it.

Whenever you place a trade, simply take a screenshot of the chart. Print it out or add it into your spreadsheet. Do the same for the result when the trade is complete.

Organize your trades by market, strategy, or another way that suits you.

Tracking your trades will help you to:

  • Identify patterns in markets, and in your approach to trading.

  • Learn from your losses. Study trades and look for correlations.

  • Reflect. You’ll have a physical record of how far you’ve come.

Trading plan takeaways

These are the key rules to follow when building a trading plan:

  • Have a physical copy of your plan and keep it handy. There is no such thing as a successful ‘mental’ trading plan.

  • Make your plan your own. Trading is a personal endeavor and you need to include the elements that will work for you, based on your own goals.

  • Treat your trading plan as a living document. It’s important to have it set in stone at the beginning, but it will continue to evolve as your trading journey progresses.

  • Keep it simple. Your trading plan is a framework and won’t include every single scenario – but it should be applicable to general trading situations.

  • Separate your plan from your trading activity. This might sound counterintuitive, but it’s important you construct your plan objectively based on your goals, not on your current emotions.


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