How to Build a Winning Trading Plan and Stick to It

Financial markets traders are looking forward to a promising 2023. 

As the fintech revolution gathers steam, there are more tradable securities, digital assets, and derivative products than ever before in the history of the trading profession.

There are also more exchanges, more ways to trade and leverage your trading, and more tools with higher quality tooling for day traders than ever before.

So if you are starting off the year with the intention of putting together a winning trading plan for your portfolio, you are fortunate to have a great deal of advantages.

Take it from any successful trader. It is worth it to take the time to put these advantages together into a coherent and winsome trading plan.

If you are just starting out trading or you’ve been stuck in a rut with recent trades, it could really make the difference.

Instead of losses or flat earnings, you can put together a trading plan that makes your trading a worthwhile and valuable use of your time in a hectic world full of business opportunities.

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How to Create a Trading Plan in a Few Simple Steps

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In this guide to building a winning trading plan that you will stick to, you will learn:

1. Specialization

How to determine the trading pairs for specific traded assets or broad based asset classes that you will arbitrate with your new and improved trading plan

2. Control

How to set trading limits based on your risk tolerance and reward appetite when trading to keep your emotions in check and your trades based on your plan

3. Intelligence‍

Best practices for staying current with your knowledge of the industries and economies you trade and scanning for your trading plan’s signals to enter or exit

4. Targeting‍

The importance of setting clear dollar figure and percentage and rate trading goals, writing them down, reviewing them daily, and revising them when appropriate

5. Journaling‍

How starting and using a trading journal daily as part of your trading routine can help you refine your trading plan and acquire specialized knowledge 

A winning trading plan starts with focusing on what you’re planning to trade.

Then after setting some trading rules based on your risk/reward profile, you can make up a flow chart of entry and exit points based on the market signals you settle on in your trading plan.

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How To Make A List of Assets You’ll Trade

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No two traders will have the same specialized knowledge, risk/reward profile, and trading characteristics.

The first step in setting up your trading plan is strategizing the trading pairs you will arbitrate for profits and what you will use as signals to enter and exit your trades.

Start by brainstorming a list of every tradeable asset you can think of that you have traded before or are interested in trading in the future.

You want to trade to win, so while you’re writing your list, try to think of assets in companies or industries that you are passionate about personally and have a knowledge advantage over. 

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Your list might include:

• Corporate stocks

• Government and corporate bonds

• Foreign currency exchanges

• ETFs

• Commodities

• Derivatives, options, and futures

• Cryptocurrencies

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After deciding on your risk / reward profile, you can then put together your daily intelligence operation to gather information about markets and make insights to manage your trades.

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Decide Your Risk and Reward Appetite

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Professional traders follow a general rule of thumb not to expose more than two to four percent of their portfolio on any given trade.

More conservative traders might not go higher than one percent.

More aggressive traders might go as high as five percent.

Managers of larger portfolios might go higher or lower than the average.

But overall it’s common practice in trading to set a hard limit on the percentage of your money that can go to any trade no matter how promising.

That helps keep emotions in check when markets are in the euphoria stage of a cycle and FOMO (fear of missing out) can lead traders to over commit their funds.

Winning trading plans also include a daily loss limit.

If the trader hits their limit and loses a certain percentage of their portfolio or trades, they stop trading for the day and return to it with a fresh outlook the following day.

This also keeps emotions in check and will help you stay out of making trading decisions motivated by fear, uncertainty, and doubt (FUD) on a bad day.

Some traders set their daily loss limit at five percent. Some set it at 10%.

Settle on one and revise it later if you should.

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Specify Your Trading’s Entry and Exit Conditions

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After getting together your list of tradable assets, and setting your risk / reward limits, you have to decide when you will make entries and exits based on market signals and conditions.

This is when your list of trading ideas and your daily risk policy start to come together into an operational trading plan.

Now your goal in putting together a trading plan is to get better results from your trades than you ever have before.

That means a higher win / loss rate for your trades and higher margins on your winning trades.

If you do the same things you did before and remain at the same level of knowledge you have now, you will most likely find difficulty improving your results.

One way to generate trading ideas about when to enter and exit a position and arbitrate a profitable gap in the market, is beginning to broaden and diversify your knowledge base.

So you can take your list of assets and begin researching them online.

As you do you can put together a list of sources of information about them that you plan to go back and check regularly. 

Your list of trusted sources for information could cover a wide range of sources:

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• News websites

• Analyst blogs

• Brokers websites

• Hedge funds websites

• Exchanges websites

• Data and analytics sites

• Trading newsletters

• Community blogs

• Web forums

• Social media channels

• YouTube

• Finance pages

• Stock screeners

• Governmental agencies

• NGOs

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In the planning phase before you start executing your new trading strategy, vacuum up as much knowledge as possible about the markets you want to trade.

While you’re learning, look for historical patterns of correlation between the price of the asset you want to trade and leading indicators that affect its price.

These will form the basis for making your entry and exit plan and then you’ll really be trading with some winning strategies in your toolkit.

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These leading trade indicators could be anything.

Like changes in macro market and financial factors that correlate with the asset, changes in the price of correlated assets, corporate earnings beats and misses, new product updates, changes in supply and demand factors in a market, and international currency fluctuations.

There is a virtually endless number of other arbitrages you can discover to find the ones that you want to trade and make your trading plan out of these ideas you generate in your research. 

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After getting together your list of trades and your trading plan, the next step that can help make sure you stick to it is writing down your goals.

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The Importance of Writing Down Your Trading Goals

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The importance of making your trading plan around a set of goals cannot be understated.

A 2015 study reported by the Harvard Business Review found that individuals in all industries and walks of life are more successful when they set clear goals and write them down.

According to the research, a disconcerting 83% of people don’t have any goals at all, 14% have goals, but haven’t written the down, and 3% have written goals.

Here’s what else the study found: The 14% with unwritten goals in mind were on average 10 times more successful than those without any goals at all.

The 3% who wrote their goals down were on average three times more successful than the 14% who had goals but didn't write them down.

So it’s important to make your trading goals clear and specify conditions of failure and success.

That way you can rework your plan if you aren’t hitting your goals.

It’s important to write your goals down, review them daily, and update them when appropriate.

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Of course it’s also important to make sure that your trading goals are motivating.

In order to be motivating, your goals must be realistic and achievable, but also challenging and transformative.

So base them on your record of trading.

If you haven’t been keeping organized trading records, consider starting a trading journal:

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Use A Trading Journal to Specialize Your Trading Strategy

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What successful traders who follow a consistent trading plan do is follow a trading strategy that they have found averages out to a certain return over a certain number of trades.

They don’t know in advance which individual trade will be a win and which will be a loss.

But traders who have kept track of their results using a trading journal have a statistical composite of their own trading data that tells them what percentage gain or loss they can expect to average after a given number of trades using a certain trading strategy.

Here’s how to use a trading journal to plan and test trading strategies, review the results, and iterate by repeating the trades that average out to meeting your trading goals: ‍

Think about how you’re going to specialize your trading strategy.

The goal of trading is beating the market, right?

Otherwise why even bother trading when you could stash your savings in a broad index fund ETF and forget about it?

Every successful trader who beats the market has found a niche or more than one niche of specialized knowledge about whatever they trade.

So they know to act on a reliable market signal they’ve found before the rest of the market participants do and make better profits.

They’ve learned that from gathering information, poking around, doing some thinking about what they’re trading, then guessing and testing a trading strategy.

For example, a trader might have found that every time U.S. federal funds interest rates go in a certain direction, an industry, stock, or currency they trade moves in a certain direction.

Or they might have found a correlation between a security they like to trade and oil and energy prices.Or they might have found a moving average crossover that is a reliable trading signal.

By the way, did you know we have a free trading plan template? Use it to kick start your trade journaling and boost your trading!

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Becoming A Successful Trader By Gaining Experience and Keeping Good Notes

Experienced traders who are successful at their craft have built up an entire trading plan out of multiple trade strategies like these they have collected through scrupulous research and careful trial and error.

By doing some market backtesting and looking at how a trading strategy you’ve thought of would have performed in historical markets, you can even take some of the guessing out of it and decrease some of the risk of testing new strategies when you commit money to a trade.

But when you do execute a trade strategy for the first time with real money in the market as part of your trading plan, start with a small amount, then gradually increase your allocation to executing that trade when the opportunity arises the more confident you become in it through experience.

Using a trading journal to record and coordinate your tests as you build your winning trading plan will help you commit to following through.

It will also put all the data and notes from your entries together in one place that’s easy for you to organize.

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When entering trades for new strategies you’re trying out, you can include notes with your reasons for making the trade and your expectations.

Then when you exit a position you can update your trading journal with the results and why you think they did or didn’t follow your expectations.

You can journal different conditions that correlate with different results.

If you make enough trades and learn from them by organizing them in a trading journal, you can eventually develop something like a sixth sense for managing your portfolio.

A trading journal helps you track your plan and optimize it until it wins in line with the goals you’ve set for yourself and your portfolio in your trading plan. 

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With the right initiative, base of knowledge, and this scientific approach of trial and error to gather evidence-based results from your trades, you will almost certainly improve as a trader much faster than you would by trying to trade without being organized like a professional.