Education

What Should Be Inside Your Trading Plan

Find out why you should have a trade plan—and the five elements that may help you put it to work successfully.

Element 1: Your time horizon
How long do you plan to hold a position? This will depend on your trading strategy. Generally, traders fit into one of three categories:

Single-session traders are very active and look to gain from small price variations over very short time periods (minutes or hours) throughout the trading day.
Swing traders target trades that can be completed in a few days to a few weeks.
Position traders seek larger gains and recognize that it often takes longer than a few weeks to achieve them.

Element 2: Your entry strategy
Look for entry signals—for instance, divergences from trend lines and support levels—to help you place your trades. The signals you employ and the orders you use to make good on them hinge on your trading style and preferences.

Element 3: Your exit plan
When it comes to an exit strategy, plan for two types of trades: those that go in your favor and those that don’t. You might be tempted to let favorable trades run, but don’t ignore opportunities to take some profits.

Element 4: Your position size
Trading is risky. A good trade plan establishes ground rules for how much you’re willing to risk on any single trade. Say, for example, you don’t want to risk losing more than 2%–3% of your account on a single trade. You could consider exercising portion control, or sizing positions, to fit your budget.

Element 5: Your trade performance
Look over your trading history to calculate your theoretical trade expectancy, meaning your average gain (or loss) per trade. You start by determining the percentage of your trades that have been profitable versus those that haven’t. This is known as your win/loss ratio.

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