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5 Steps to Building a Winning Trading Plan

5 Steps to Building a Winning Trading Plan

By CMM Team - 26-Feb-2024

Every trader needs a plan. Without it, they’re just gambling.

Maintaining a disciplined and systematic approach to the market helps a trader rapidly improve their performance through objective analysis, rules-based risk management, and building confidence in themselves and their system. Of course, there is no guarantee any particular trade will make money. But traders who treat the market like a business have a much higher probability over the long term of remaining profitable and surviving the trading game.

Every trading plan will be different. But every trader needs one. So, here are a few tips for how do design a winning trading plan. 

Define Realistic Goals.

Anyone who is new to trading or who is building their first trading plan should pause to think about what they want from trading. They should know their financial goals, risk tolerance, time commitment, and investment horizons before ever starting this labor-intensive game. 

Everyone wants to be a billionaire, but a trader’s goals should be realistic and achievable. Trading is not a guaranteed path to generational wealth, and it comes with a lot of inherent risks. Realistic expectations for what a trader can take from the market need to be set. 

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Develop a Trading Style and Strategy.

Good traders understand their personal preferred style of participating in markets. Their style reflects their personality, habits, and appetites for short or long term trading and risk taking. A detailed version of this style and how it becomes a strategy should be outlined. In short, this means defining what criteria allow a trader to open a position and which criteria would not allow it. From technical indicators to technical analysis, all of these rules need to be specified. 

Set Trade and Risk Management Rules.

How much risk a trader takes and how they manage it are the two most important components of any trading system. What order types, market analyses, and sizing rules a trader uses are all part of this equation. After taking a trade, rules need to be set for how to manage it. Does the trader actively monitor the market and adjust the trade? Or does the trader take a set-and-forget approach that ends in being stopped out or taking profit? These questions need to be answered. 

Continuous Education and Analysis.

A trader needs to constantly be educating themselves on what the market is doing and how to find new potential trade opportunities. Alpha decays over time, and a trader cannot expect to use the same strategies for their entire career. Learn and adapt or die. Traders should always try to stay updated on market trends, new trading techniques, and even thoughts from other experienced traders to enhance their knowledge and skills.

Monitor Performance and Discipline.

After designing a trading plan, the trader needs to stick to it. They should avoid at all costs situations where they abandon their trading plans to act impulsively or emotionally. Great traders train themselves to embrace consistency and discipline when entering the market. Part of this training involves monitoring their performance, which is why trading journals are so valuable. Studying a detailed record of entries, exists, sizing, wins, and losses is necessary to becoming profitable. Every past trade allows a trader to identify patterns, strengths, and areas for improvement.