How To Create A Trading Plan Vs. Trading Strategy – Step by Step


A solid trading plan is the cornerstone of your trading business. And you see many traders think that all they need is a trading strategy. And this is not the case. So let me explain the difference between a trading strategy and a trading plan. First, let’s talk about what is a trading strategy. You see a trading strategy is surprisingly simple because it only has two main elements. A trading strategy tells you first when to enter, and number two, when to exit. The entry rules can be based on fundamental analysis or technical analysis, such as indicators or chart patterns. As an example, an entry rule for a trading strategy could be buy when the 3-day moving average crosses the 7-day moving average from below. And there are two types of exit rules. Number one, exit rules for taking profits, and number two exit rules for limiting your risk. This is also known as stop losses. And here’s an example for a profit taking exit rule. Sell after the stock move 10% in the desired direction. And here’s an example for a stop loss exit rule. Sell if the stock moves 5% against you. As you can see, a trading strategy is fairly simple. On the other hand, a trading plan is more complex, but absolutely necessary. So what is a trading plan? You see, a trading plan covers at least seven elements. Number one, the market you want to trade. Number two, the timeframes you want to trade. For example, 5 minute, 10 minute or tick bars, range bars. Number three, a brief description of the strategies that you want to trade and when to use what strategy. The fourth element of a trading plan are the entry rules of the strategies you want to use. And the fifth element are the exit rules of the strategies. Now, rule number six, or element number six of a trading plan are other important rules. For example, when to trade and when not to trade. And then the seventh element is the money management approach that you’re using. So let’s talk about each of these elements in more detail. And let’s start with number one: markets. Do you want to trade stocks, options or futures or forex? You see, I personally like to swing trade stocks and options and then I like to day trade futures markets. By the way, if you’re interested in learning how I personally trade, go to mytradingroutine.com. It’s a website that I set up for you where I show you exactly how I pick the best stocks to trade, when to enter and when to exit. But anyhow, let’s go back to the first element of a trading plan, the markets. You see it’s important to define the markets that you want to trade in your trading plan so that you don’t get distracted. One of the biggest mistakes that traders make is “chasing shiny objects.” Some traders trade stocks this week and then binary options the next week for no apparent reason. Often traders switch markets after a few losing trades, or after reading another exciting email promising them trading success if they traded this market. Don’t fall for this. Learn about the different instruments that you can trade and then decide which ones you want to trade. And that is the first element in your trading plan. The second element is the timeframe. See you can trade on many different timeframes. For example, daily or weekly or monthly or even intraday, like for example, 60-minute charts, 30-minute charts, 5-minute charts. You get the idea. Choose the timeframe based on your availability to trade the markets. For example, if you can watch the markets every day, even if it is just in the evenings, then you should choose a daily timeframe. And if you only have time to focus on the markets on the weekend, then you should use a weekly timeframe. And only if you can watch the markets throughout the day, then you should use an intraday time frame like, for example, five minutes. Now some traders think that day trading is more dangerous than swing trading, and that’s not true. As a rule of thumb, the bigger the timeframe, the more money you have to risk. Let me give you an example. Here right now you see an image of a weekly chart of Apple. And as you can see, the average weekly move is $10.30. So if you’re trading a weekly timeframe, then your stop loss should be at least $10, preferably even $15. Otherwise, you get stopped out right away with a, with just a small move, right? Now, here right now you see an image of a daily chart of Apple. So before it was weekly this here is daily. And as you can see the average daily move is $4. So if you are trading a daily timeframe then you stop loss should be at least $4, preferably even $6. But as you can see, it’s already smaller than on a weekly timeframe where it was $10 to $15. And right now here on the screen, here you see an image of a 5-minute chart of Apple. And as you can see, the average 5-minute move is only 30 cents. So if you’re trading a 5-minute time frame, then your stop loss can be as low as 40 to 60 cents instead of $10 to $15 on a weekly chart. So as you can see, the lower the timeframe, the less money you need to risk. And choosing the right timeframe that is best for you is this second element of a trading plan. Now, before we move on to element number three, is this helpful thus far? Because if it is, click on “Like” and let me know that you’re enjoying this video. Oh, and while you’re at it, make sure to subscribe to my channel and hit the little bell because this way you get notified whenever I release a new video. All right. Let’s move on to the third element of your trading plan. This is a brief description of the trading strategies. You see each trading strategy has an underlying idea. As an example, a trend following trading strategy takes advantage of trends in the markets. And a trend-fading strategy looks at overbought and oversold situations. And earnings strategies designed to take advantage of explosive moves after earnings are being announced. And then there’s a scalping strategy that takes advantage of small moves in the markets, often only a few ticks. You see, you must know the underlying rationale and assumption behind your trading strategy so that you know about the best time to trade this strategy. As an example, if your day trading and want to use a trend following strategy, then it’s best to trade this strategy shortly after the open, and then again going into the close, because that’s when most markets have the best trends. Often markets are just going sideways during the lunch hour and also in overnight trading. So if you plan to trade during these times, you might want to focus on a scalping strategy, include a brief description of the trading strategy or strategies and this is the third element of a solid trading plan. And by the way, if you would like to have my personal trading plan, if you would like to know how I trade the markets, go to mytradingroutine.com. It’s a website that I set up for you, there’s a video where I explain everything in detail. But let’s move on right now here in terms of trading plan. Let’s talk about the fourth rule of a trading plan. Entry rules. See, this is pretty easy because every trading strategy comes with very specific entry rules. Just copy and paste the entry rules from your trading strategy into this section of your trading plan and you’re all set. Now, if you choose to trade multiple trading strategies, make sure to post the entry rules from each trading strategy sorted by trading strategy. All right. Moving on, element number five, exit rules. Same here as entry rules. Simply copy the exit rules from your trading strategy into your trading plan, and make sure that you have rules for exiting with a profit and rules for exiting with a loss. The biggest mistakes of traders is that they don’t have specific rules and exit “when I made enough money,” and trust me, there’s never enough money in a trade. You want to make sure that you don’t let a winning trade turn into a losing trade by holding onto it for too long. Have specific rules for exiting your trading as part of your trading plan. All right, second to last element number six, other important rules. You see the more you specify in advance, the less you have to make decisions in the heat of the moment. In your trading plan you should clearly define how to trade around holidays. For example, Black Fridays or the days between Christmas and New Year. You want to specify how to trade around major economic reports because this is important when day trading, often the markets go crazy when a major economic report is being released. And as a rule of thumb, I personally don’t trade five minutes before and after a major report. And again, if you would like to know how I personally trade go to mytradingroutine.com. Anyhow another important rule is do you have daily or weekly targets? Some traders stop trading after they achieve a daily or a weekly profit goal. I think this is a great idea. Do you want to incorporate it into your trading plan or do you prefer to trade without any targets? What do you do when you feel sick? See I personally don’t trade when I don’t feel 100%. After all, in order to succeed with trading, two conditions have to be met. Number one, the markets have to be ready. And number two, you have to be ready. It’s a good idea not to trade if you don’t feel 100%. You get the idea. See, this section of your trading plan is very important and you will add to it as you get more experience. Over time you will have a super solid trading plan that keeps you out of trouble and helps you to grow your account. Okay. Before we move on to element number seven, is this helpful thus far? If it is, click on “Like” and let me know that you are enjoying this video. Oh, and while you’re at it, make sure to subscribe to my channel and hit the little bell, because this way you get notified whenever I release a new video. All right. Element number seven, money management. Money management tells you how much to risk on any given trade based on the amount of money that you have in your trading account. The easiest money management approach is the fixed rational money management. When using this approach, you risk a fixed amount of your trading account on any given trade. One of the most popular approaches is the 2% rule, which says never is more than 2% of your account on any given trade. The problem with this approach is that your account will grow rather slowly. You see, I personally recommend the fixed ratio money management approach to my private students, because with this approach, you
increase the risk based on the amount
of profits that you make. And this approach is the fastest way to grow your account. I’ll write another article and do another video about it shortly, it would take too long to explain it right now. Anyhow, as you can see, a trading plan is much more comprehensive than a trading strategy. The main purpose of a trading plan is to define what trading strategies you trade and when. Creating a trading plan is not that difficult and now you know the seven important elements of a rock-solid trading plan. So take the time to write your trading plan and then test it on a trading simulator to make sure that you’re getting the results that you expect. And again, if you would like to see my trading plan, go to mytradingroutine.com where I show you exactly the indicators that I use, the markets that I trade, I mean, pretty much all seven elements are in there. Anyhow, let me know if you have any questions and leave a comment below. Hope this helps and don’t forget to subscribe to my channel and hit the little bell so that you get notified whenever I release a new video. And check it out mytradingroutine.com. I’ll talk to you soon.

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