The Guide to The Ultimate Trading Plan
If you've been on other trading blogs, or if you read a couple of articles on DesireToTRADE, you probably heard that a trading plan is one if the key to great trading.
The truth is: you MUST develop your trading plan.
Some might say “Well…I know what I’m doing. I like to be spontaneous with my trading”. That kind of thinking is not going to win big in trading. You must have some sort of structure and act like a business even if you’re trading around the world or on a beach somewhere in Thailand.
But now, how do you prepare that trading plan? The answer is…just like a business plan. Let me explain.
The ideal trading plan is divided into a few sections. You will need to take time to think about each section. If you want to do it well, you can spread the process over 10-15 days. In this way, you will need to work on your trading plan 30-60 minutes a day.
The first thing you want to do is to set a specific time everyday during which you will put all your focus on your trading plan. That can be in the morning or once you get back from work. Before starting, create a new document and add the following sections:
- Life Mission
- Values and Beliefs
- Financial Objectives
- Market Analysis
- Development Process
- Strategy & Implementation
- The Trader
Once your document is ready, you can start the process described below. One important thing to keep in mind: Consistently profitable trading is possible only if you believe in it. That fact alone can make the difference between the trader who succeed and the one who gives up.
As you perform the steps below, I recommend that you take notes on a computer or on paper and that you write your actual trading plan only when all the steps are completed. That will help you to eliminate what is too vague and not useful for your Ultimate Trading Plan.
STEP 1: DEFINING YOUR LIFE MISSION
The first step in the development of your trading plan consists of defining precisely what you want to achieve in life. It is the basis for anything. As you take notes on your computer or on a sheet of paper, you can ask yourself the following questions:
- What legacy do you want to leave?
- Why do you want to trade in the first place?
- If you had all the money you needed, what is one thing that you would do?
Quick Tip To Get Real Answers
Trading, like any other money-making activity, should not be performed only to accumulate money. There must be an underlying reason behind it. What are you going to do once you get all the money you want? That THING is your Life Mission. It is the ultimate aspect of life you want to achieve or reach. It should not be material, but instead a state you want to be at.
As an example, let me give you my Life Mission. I want to travel the world and be able to live wherever I want whenever I want to. I also aspire to experience stuff, meet people everywhere and live life at its fullest. I believe that a life of 9-5 work is not fulfilling enough. At the same time, I also want to help people do the same thing. I’ve always been interested in mentoring or coaching. If I can help people escape the 9-5, that is a big win!
For your Life Mission, I recommend that you write a paragraph describing what your future will look like. Imagine your future self as a trader and simply tell what you are doing on a daily basis. Use the What?, When?, Where?, How? approach.
STEP 2:DEFINING YOUR VALUES & BELIEFS
This section is closely linked to your Life Mission but slightly different. You must go through what you value and what you believe. Obviously, if you believe you can’t accomplish much, it’s going to be harder to perform as a trader.
Values are things that are important to you. What would you be ready to fight for? For instance, during a weekend, do you tend to work or you prefer having time with your family?
Some examples of values are:
- Financial Freedom
Values are going to propel you across obstacles. They will help you remember, in a few words, the main reason why you are trading. Want to know whether you identified the right values? If you look at your list and feel excited, then it’s a good sign. If, however, you don’t feel anything, you might want to research further and think a little more.
Three types of beliefs
Beliefs are the things you are 100% are true about yourself and the world around you. While thinking about your beliefs for your trading plan, you must consider three types: money, trading, and personal beliefs.
Money beliefs are the things you believe about money. For instance, some people say “Money is the root of all evil”.
On the other hand, I believe money is a tool to bring more freedom into your life. Both version of the belief will lead to entirely different trading results. Whatever your money beliefs are, you must make sure that they are congruent with gaining money through trading.
In addition to those, you must identify what you believe about trading. Unfortunately, my parents believe trading equals gambling. While this in part true in certain situations, you should ask yourself whether you really see trading as a money-producing activity. Make sure that you believe trading will help reaching your Life Mission.
Ask yourself: “Can I really gain money trading?” or “What is the hardest part of trading?”. “Do I believe short-term trading is better than long-term trading?”.
Lastly, you must identify what your personal beliefs. What do you believe about yourself? Do you think you can succeed as a trader and why? Those beliefs are very important. In trading, if you have doubt about your skills, you might miss out on good trades and enter bad trades to try to prove to yourself that you can make money. This is not the ideal situation.
If your personal beliefs are not strong and positive enough, I recommend that you work on yourself a little more before starting to trade. You can follow trading courses or visit the coaching section of my site to get a personalized trading learning process.
For each belief you identified, you must write a reason why you believe it. An example of belief with a reason could be: “I believe I can trade profitably and be a successful trader because many people who did it were no smarter than me.”
The other key is that you must believe what you write. Failure to believe at 100% and everything you write will result in a weak trading plan.
STEP 3: SETTING YOUR GOALS
The third section consists of your trading goals. What you will include in this section are both short-term and long-term goals that you will reach by trading.
In order to set your goals, you must decide exactly what you want. Your long-term goals will be reached within the next 5 years. You should take some time thinking about them because setting goals that do not excite you may end up being boring.
As much as possible, set goals that are specific and put a date on them. Be ambitious though. Ambition isn’t dangerous! Write your goals as if already achieved them. For instance you could say: “On December 31st 2016, I have enough money to travel 6 months across Europe ($40,000)”.
Once your long-term goals are established, you can break down the process by setting short-term goals that you will achieve within 6 months to 1 year. Again, make them specific and set a date. You could write, for instance, “On October 1st 2015, I trade a live account and follow a trading strategy I practiced for 5 months”.
STEP 4: CALCULATE YOUR FINANCIAL OBJECTIVES
This section is where you dive deeper into your finances. While you may have set financial goals in the previous section, this part consists of detailing the money you will earn and the money you will spend. In the end, you will establish your Target Trading Income (TTI).
To make this part simpler, you can download my free Financial Planning Worksheet. It contains everything you need to calculate your TTI.
If you prefer doing it on paper, draw two columns. At the top of the first column, write down “Expenses”. At the top of the second column, write down “Revenues”. Then, in the appropriate column, list all of your monthly expenses and all of your current monthly revenues excluding your trading revenues. In the “Expense” column, add the monthly cost of the goals you wrote in the previous section. For instance, if your goal is to accumulate $30,000 in 17 months, the monthly expense is 30,000/17 = $1,765 per month.
Recently, I started reading a very popular and well-known book by Tim Ferriss called The 4-Hour Workweek. On chapter 14, he shows his readers that some goals, especially traveling and buying a car, can be achieved for a lot cheaper than what most people expect. He also gives incredible advice on working less to get more, which applies to trading. I strongly recommend you read that book. If you ever want to buy it, here is the link (it is an affiliate link but I truly appreciate if you use it).
Back to your financial objectives…
At the bottom of each column, write down the sum of your monthly expenses and the sum of your monthly revenues. Then calculate Monthly Expenses – Monthly Revenues. The result of this equation is your Target Trading Income (TTI). This is what you will aim to gain per month as a result of your trading only. Whatever that number is, you can get it.
STEP 5: PERFORM A MARKET ANALYSIS
This part focuses mostly on you as a trader given the environment you are in. More precisely, two components are important. In the first place, you must determine what are your beliefs about the market. Some beliefs may be repeating from Step 2 but that is fine. More precisely, this step will require you to write down what you know is true about the market. With all the articles you read so far, you are probably able to answer questions like: “What do I believe are good trading signals or good indicators?”, or “How is the market working?”, or even “What time frames do I believe are best to trade?”.
Remember that you must write down the reason why you believe in each of your beliefs. The second activity in this step is to perform a SWOT Analysis. Think a little bit and write a few notes on the following topics:
- Your strengths as a trader
- Your weaknesses as a trader
- The opportunities around you with regards to trading (people you can reach out to, education you can get, etc.)
- The threats that may make it harder for you to trade profitably (lack of self-discipline, too much excitement, etc.)
This analysis is very important because it will help you identify areas you might need to work on and other aspects you might be able to benefit from.
Only when this step is done, you can go to Step 6.
STEP 6: DESIGN YOUR DEVELOPMENT PROCESS
This step is pretty straight forward but the challenge is to stay committed to it once you start trading. The goal here is to define how you will develop and transform yourself as a trader.
First, if you do not have a lot of knowledge in trading, decide on how you will acquire it. Are you going to take classes, buy an online course, or even get coaching? If you prefer to learn by yourself, it is perfectly okay but you should still specify it in your Ultimate Trading Plan. If you intend on getting paid training, set a budget and add it to the expenses in your Financial Objectives (Step 4).
Secondly, decide how you are going to get trading practice. Your trading skills, like any other skill, increase greatly through practice and hands-on experience. Some people prefer to start trading straight up with a live account. Other people trade a few months in a demo account until they are confident they can reproduce the results on a live account. It’s up to you to choose.
If you want to start trading a live account right away, decide how much money you will put in it and what will be the size of your position. If you opt for this, I recommend that you fund your account with money you can afford to lose. You should ideally trade small positions as well. Losses are inevitable in the beginning.
If you prefer to start with a demo account, set a time limit at which you will start trading live. When you trade for too long on a demo account, you might become used to it and uncertainty about trading with real money will increase.
Even these days, if I want to implement a new strategy, I start by trying it on a demo account. My time limit is the following: I transition on a live account once I get a profitable return over a three-month period. If I lose a little bit during one month but gain during the other two, I will still transition to a live account. For some, three months of demo trading might be too long but I like to analyze my strategy a lot.
Again, the key is to respect the rules you just established once you start trading. Do not spend $10,000 on trading education if your budget was $500. Similarly, do not open a live account after two weeks if you intended to trade on a demo account for two months.
STEP 7: COME UP WITH A TRADING STRATEGY & IMPLEMENTATION PLAN
Your previous efforts are about to get cultivated with this step. Your trading strategy is the main direction you will follow once you start trading. This section of your Ultimate Trading Plan will describe every single detail of your trading.
If you do not have a strategy in mind yet, you probably haven’t looked around enough and I recommend you do so before you complete this step.
Start by noting your trading rules. This includes but is not limited to:
- Time frame (what time frames you are looking at)
- Signal (what you see)
- Entry point (when you are entering the trade)
- Stop loss (where you are getting out of a losing trade)
- Take profit (where you are taking your profit and running away)
- Position size (how much money you are spending on a trade)
- Money at risk (how much money you are ready to lose on a trade).
In this section of your Ultimate Trading Plan, do not forget to include your trading routines. In other words, write a little bit about the moment at which you are going to be in front of your computer to trade. For instance, if you trade the daily chart like me, you will most likely need to check out the candle close at 5 p.m. Eastern Time. However, if you trade on the 15-minute chart, you would be better to set a time block during which you will be trading. One of my friends trades Forex between 8:00 a.m and 11:00 a.m. on the 15-minute chart. Then, he stops for the day.
Lastly describe how you will keep track of your trades. Whatever your trading type, you must record your trades somewhere. This will allow to go over them later and find ways to improve.
You can use a fancy service like TO ADD to get your trades recorded automatically or use a simple app/software like Evernote or Microsoft Excel. If you subscribe to Evernote from this link, we will both get the Premium version for free. Personally, I have my trading journal in Microsoft Excel because I can calculate stuff more easily. You can know more about my journal by clicking here.
Whatever you choose to do, just get clear on it and follow through.
STEP 8: EXPLAIN WHO IS THE TRADER AND WHAT HE IS DOING
This step is not the most obvious one. Many people skip it but I like it. What you must do is to explain what you, as a trader, must do in order to succeed. What are your responsibilities? Are you allowed to modify your trading system? If so, when?
Once you are clear on that, you can continue with the fun part. How are you going to be rewarded by trading? You must agree on some rewards to motivate yourself. The thing is, you shouldn’t base your rewards on the money you make. Instead, you should define a self-reward for following your trading rules. Your reward can be a simple dinner with your loved ones once you have respected your trading plan for 2 weeks. It could also be taking an evening off to watch a movie. If, however, you do not follow your trading rules, you are not allowed to do your reward activity.
The simple fact of having rewards can change entirely the consistency you will have in trading. Write them in detail.
It is important that you accomplish each step as you read. Before considering your Ultimate Trading Plan completed, you should review your notes for each step and pack the important stuff into a nice document. Make sure that you haven’t skipped any step or your trading plan will be incomplete. If you have a plan including the following:
- Life Mission
- Values and Beliefs
- Financial Objectives
- Market Analysis
- Development Process
- Strategy & Implementation
- The Trader
I recommend that you read it at least once a week to ensure that you know every single word by heart. You will tend to follow your plan more if you truly know by heart everything that’s inside.
Remember that my trading plan changed my trading life. It is something you want to take seriously. If you have your trading plan but are unsure if it is solid enough to start trading, I can check it for you and we can have a 30-minute discussion about it. Visit the Trading Plan Review page for more information.