Ten Steps to Building a Winning Trading Plan

Ten Steps to Building a Winning Trading Plan
by Matt Blackman (Contact Author | Biography)

There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."

If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes. Whether or not you have a plan now, here are some ideas to help with the process.

Disaster Avoidance 101…Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan - it is a recipe for disaster. "If you don't follow a written trading plan, you court disaster every time you enter the market," says John Novak, an experienced trader and developer of the T-3 Fibs Protrader Program. John and his wife Melinda, who is also his business partner in Nexgen Software Systems, run a number of educational trading chat rooms to help traders learn how to use their software and, more importantly, learn how to trade.

In a nutshell, their software identifies Fibonacci areas of support and resistance in multiple time frames and provides traders with specific areas to enter and exit the market. Once a trader knows where the market has the potential to pause or reverse, he or she must then determine which one it will be and act accordingly. "Even with the best program, market data and analysis, odds for consistent success range from slim to none without a written plan," says Novak.

The Nexgen website offers examples of trading plans and useful market information for the benefit of both clients and non-clients alike. "Like the markets, a good trading plan evolves and changes, and should improve over time," says Melinda Novak. A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves. Each trader should write his or her own plan, taking into account personal trading styles and goals.

Using someone else's plan does not reflect your trading characteristics.Building the Perfect Master PlanWhat are the components of a good trading plan? Here are 10 essentials that every plan should include.

Skill assessment - Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? If not, it's a good idea to read Mark Douglas's book, "Trading in the Zone", and do the trading exercises on pages 189–201. This will teach you how to think in terms of probabilities.

Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.