Q&A: What does a good trading plan include?

by David Jenyns on July 31, 2011

Question by Janson P: What does a good trading plan include?

Best answer:

Answer by Eric LeRiche
A good stock trading plan has a strict set of rules and actions which formulate your stock trading strategy and it defines when to buy and sell stocks and at what prices.

There is an old saying in business: “Fail to plan and you plan to fail.” It may sound
depressing, 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 follow a
plan,ideally 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.

So, what’s a trading plan anyway?

A stock trading plan is a strict set of rules and actions which formulate your stock
trading strategy. A stock trading plan defines when to buy and sell stocks and at what
prices. Every trade you make should be governed by your trading plan.

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. Like the markets, a good trading plan evolves and changes, and should
improve over time.

Trading Plan Essentials

There are many essentials you should include in your business plan. These essentials lay
the foundation of your plan and will help you reach your goals. Here are 10 essentials
that every plan should include:

1. Are you ready? -Are you familiar with your trading platform and its resources? -Do you
know the current economical status and current trend we’re in? -Do you know proper money
management rules? -Do you have good equipment

2. Mental preparation -The most important part is to know your stuff well enough to teach
it -Even if you are knowledgeable, you need to follow your plan (yes this means you need
one…) -You need to be calm, focused, well rested, well nourished, free of distractions
and “in the zone”

3. Set your tolerance level -How much of your portfolio should you risk on any one trade?
Once again, follow your plan which should include such a possibility.

4. Set goals -Before you enter a trade, set realistic profit targets and risk/reward
ratios. Set weekly, monthly and annual profit goals in dollars or as a percentage of your
portfolio, and re-assess them regularly.

5. Trade preparation -Before the trading day, reboot your computer(s) to clear the
resident memory (RAM) -Identify the stock you want to follow -Refine your “buy list” -What
price are you willing to pay? -Does the stock have good volume? V -Using Technical
Analysis -Using Fundamental Analysis*

6. Do your homework -Before the market opens, what is going on around the world?

7. Set exit rules -Most traders make the mistake of concentrating 90% or more of their
efforts in looking for buy signals but pay very little attention to when and where to
exit.

8. Set entry rules -This comes after the tips for exit rules for a reason: exits are far
more important than entries.

9. Keep excellent records -All good traders are also good record keepers.

10. Perform a post-mortem -After each trading day, adding up the profit or loss is
secondary to knowing the why and how.

For a trader, the preparation means making your plan, developing your strategies, testing
your techniques, and continually refining it all. The opportunities are there for us to
take advantage of. We will only find success when our preparation intersects with our
opportunities.

Happy trading

Eric LeRiche
|| WARNING: Do Not Try to Invest In Stocks
|| Until You Get These 7 Secrets… FREE

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