How to Create a Complete Trading Plan
When someone first starts day trading they have two questions they want answered. When do I buy? When do I sell? To get these questions answered they usually find a nice picture with some simple trading patterns (see image below) and try to follow the plan. So why do they fail?
What a Trading Plan is NOT
Many new traders fail because they are following a trading pattern but they don’t have a trading strategy or a trading plan. A trading plan is NOT the same as a trading pattern or a trading strategy.
What is a Trading Plan?
Trading Pattern – Price action pattern that can be observed on multiple time frames and is determined after a potential trade has occurred.
Trading Strategy – A set of conditions, such as news, price action (trading pattern), volume, market conditions or company fundamentals, that when meet determine how to trade the stock.
Trading Plan – A Trading Strategy with specific entry price, stop lose price, and profit target price.
You are a pattern trader if you only allow price action (that looks like a trading pattern) to determine when you enter a trade and exit a trade. If you use any other indicators than you might have a trading strategy. If you have defined, before you take the trade, when you will enter and when you will exit (for loss or profit) then you have a trading plan.
How to Make a Trading Plan
A complete trading plan is like a script that you write out and then execute. The first step is to identify trading strategies that you can recognize consistently. Once you have documented these trading strategies (a set of conditions), you need to identify stocks that meet these strategies each day. Finally, you make a plan to determine when you will enter the trade and when you will exit the trade.