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How to Create a Successful Trading Plan

How to Create a Successful Trading Plan – Step-By-Step Guide

If you’re looking to trade futures, stocks, or any other investment type, you need to know what you’re doing. To make it in the futures market, you’ll need to know how to create a successful trading plan. In simple terms, this is a roadmap that determines which factors you pay attention to as you move forward with your trading. Think of it this way:

How will you know when you have achieved your investment objectives? Your trading plan will help identify your starting point, travel direction, and end goal. It is the foundation of your future investment strategy and will help balance risk and reward.

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What is a Trading Plan?

A trading plan is the cornerstone of your future investment strategy. You have to build it around your personal goals and objectives. It is important to remember that there is no one-size-fits-all when it comes to trading plans. There may be many similarities across different trading plans. How they are tweaked and what you include will come down to your aims/preferences. For example, your trading plan would be very different if you were a day trader/swing trader compared to someone contributing each month to a collective investment.

Main factors to consider with your trading plan

Some of the significant factors to consider when putting together your trading plan include:

  • Entry rules
  • Exit rules
  • Risk management
  • Size of positions

Even just a glimpse at the above issues will likely have your mind working overtime. The best way to start your trading plan is to write as many ideas as possible on a sheet of paper. Many of these may be throwaway comments which can be thrown away and taken off your list. As you continue to filter your ideas and comments, you will slowly but surely create your futures trading plan’s core elements.

Why do you need a trading plan?

Many people fail to recognize that it is just as essential to have a selling strategy as it is a buying strategy. There will be occasions where you need to bite the bullet and cut your losses. As any investor will know, without a definitive trading plan, there is often a temptation to sell your winners early (banking those elusive profits) and run your losses (often ego-led). In most cases, that is the exact opposite of what we should be doing!

As we touched on above, nothing is ever set in stone when it comes to investments, which goes for your trading plan. That said, unless you have spotted a significant issue/error within your trading plan, you must resist the temptation to bend the rules and blur the lines. If you believe that elements of your trading plan are wrong or out of date, change them. However, don’t be tempted to bend the rules just for the sake of it – you may well pay the price further down the line.

How to Create a Trading Plan 

In theory, creating your trading plan seems relatively straightforward – at least in your head. You have specific investments in which you specialize, such as S&P 500 futures, and you “know the market.” You may only question your initial thoughts when you begin listing your trading plan’s various terms and conditions. 

Trading Plans for Short-term traders

For example, any day trader/swing trader will place great emphasis on technical analysis and may incorporate the likes of:-

  • Trend indicators
  • Momentum indicators
  • Volatility indicators
  • Volume indicators

As we have covered in some of our previous articles, each of these four technical analysis areas incorporates a raft of trend indicators, oscillators, and relative strength calculations. 

Trading Plans for Long-term investors

We will now compare this to an individual who simply invests a set amount of money into a collective investment plan each month. They may place great emphasis on:-

  • Long-term returns
  • Taking advantage of short-term price falls
  • Regularly analyzing the performance of each fund

They still have a trading plan; it may not be as in-depth as that for a day trader, but there are still conditions to be met and an ongoing fund performance analysis. If, for example, the collective investment underperformed its peers for two quarters in a row, this may indicate a switch is needed.

We have deliberately looked at actions and trading plans deemed to be at opposite ends of the spectrum. In all likelihood, your personalized trading plan will come somewhere in between.

A step-by-step guide to successful trading plans

We have briefly covered the various concepts and conditions which may be relevant to your trading plan. While appreciating that nothing is set in stone, and there is always a degree of flexibility, we will now take a look at a step-by-step approach to creating your trading plan.

Step 1Making the most of your skills

It is worth reiterating that to be a successful trader, you need to have a degree of genuine interest in the type of investments you are looking to trade. If you are risk-averse, it doesn’t make sense to look at futures trading, which can be volatile, pressurized, and fast-moving. If you have an interest in trading commodities, then don’t create a trading plan around equities. Yes, there is an overlap of skills, but these two investment classes are very different.

Matching your skills and interests within your trading plan can be challenging, but if you get it right, you may be on the road to untold wealth.

Step 2Are you able to stay focused?

Whatever type of investment you are looking at, there will be times of volatility, uncertainty, and pressure. Are you able to keep your head while all around you are losing theirs? If so, this is an excellent attribute for your trading career. As you work through the trading plan, you will notice that specific procedures/conditions are in place to remove some pressure. It is fair to say that some traders “thrive on pressure,” but this is not healthy in the medium to long term. 

Over time, you will note that trading activity comes down to quality, not quantity, like most things in life. If there are no trades to make, don’t bend your own trading plan rules to find one. Trading for the sake of it is the first step on the road to ruin. If you get the chance, enjoy any time off!

Step 3Risk profile

When it comes to risk profiles, there is a tendency for people to look at futures contracts as riskier than regular run-of-the-mill collective investments transactions. Yes, futures contracts can be volatile and, in some cases, unpredictable, but your risk profile is a reflection of all of your investments. The introduction of buy-signals and stop-loss limits, used in tandem, will maximize your upside while minimizing your downside. If you operate this type of insurance policy with all your investments, an integral part of your trading plan, this will significantly reduce your collective risk profile.

Some investors will separate their funds into different risk categories, maintaining a core portfolio and funds for more speculative investments. Your age can sometimes play a significant role in your short, medium, and long-term risk profile, especially if you are approaching retirement and looking for a degree of security.

Step 4Respect fear and greed

Fear and greed are behind a considerable number of investment decisions, especially for those who do not have a trading plan to fall back on. As we touched on above if you don’t have a starting point, travel direction, and final destination, how will you ever know if you have reached your investment goals?

Whether you are an experienced trader, first-time investor, or somebody you have bought and sold futures for some time, you will have come across fear and greed regularly. There is a saying in investment circles:

“Leave a little bit for the next person.”

This rule refers to overbought and oversold positions, which can very quickly turn against you. As Lord Rothschild once put it:

“I never buy at the bottom, and I always sell too soon.”

It is crucial to resist the temptation to be greedy. Especially after you meet the particular goal, you had in mind. Your trading plan may have indicated the market is overstretched and due for a pullback at some point. When the market does turn, futures contracts can be extremely volatile, especially those involving indices such as the S&P 500.

Step 5Do your research; markets never close

Between Europe, Asia and America, it is possible to trade 24/7 on an array of leading index futures. Consequently, there can be huge fluctuations between the domestic market closing and reopening the next day. It is essential to be aware of issues overnight, market movements, and how these may impact your investment decisions. So, create a morning routine for yourself. Allow yourself to check the markets overnight and get a feel for what is happening.

It is also vital to monitor forthcoming economic and earnings data, impacting the broader market or specific investments. When there are some doubts and confusion regarding forecast figures, some investors will step back from the unknown. This cautious approach may see the market oversold and a buying opportunity emerge. For example, let’s say you believe that the worst-case scenario was already priced into the S&P 500 index. In that case, it may be worth taking a futures position.

The worst-case scenario has already been factored in. That’s why anything slightly better could result in a sharp bounce in the index. So, while it is essential to be cautious, it’s also imperative to have confidence in your research. You need to get a feel for the market, so to speak. If you are concerned, leave any new investment and let the markets settle, it is as simple as that. 

There are many ways to monitor trends, the most popular being the use of moving averages. These can indicate what is known as “golden crosses,” where an uptrend emerges with all indicators moving in the same direction. This area is directly related to your risk profile and your general appetite for risk.

For example, many traders will use three moving averages, 10-period, 20-period, and 50-period graph lines. For day traders, a period could be one hour, while it could be one day for more traditional traders. When an index or investment is about to break out of a downturn, several patterns will emerge:

  • The real-time price will move up through the 10-period average
  • As the trend continues, the 10-period average will move up through the 20-period average
  • Finally, the “golden cross” will emerge when the short period moving average breaks through the 50-period trend line

So, as you see this particular pattern emerging, it is essential to prepare yourself to trade. Which indicator prompts you to trade will depend upon your risk profile:-

  • Short-term traders may act on the price going through the 10-period moving average
  • Risk-averse traders may wait until the 10-period average goes through the 20-period average
  • Those with a more conservative attitude to risk may wait until the “golden cross” has emerged

As each pattern emerges, the trend appears to strengthen. The “firmer” this changing trend, the more appreciation is missed from the upturn’s early stages. This process is a balancing act and something fundamental to any trading plan.

Step 7Planning your exit route

Many people may be surprised to see that we cover exit routes before even looking at entry points. Doing so is no different from everyday life when you buy a product to resell immediately. For example, you may have spotted a vintage car worth $100,000 but is available for just $70,000. So, whether or not you can reduce the price with further negotiation remains to be seen, but $70,000 appears to be a “low price.”

In this situation, you know that the real market value is closer to $100,000. So, before you have even acquired the vintage car, you already have an exit route in your mind. You may even have already approached potential buyers. At first glance, it may seem challenging to use this particular strategy with futures investments or stocks and shares. However, if you take a step back and look at it from a distance, it does start to make sense.

For example, the S&P 500 took a downturn to 3500, but you believed that the medium-term level should be 4000. In theory, you have your exit price before you have even opened your futures position. In many ways, you are taking advantage of short-term price fluctuations. Your hope is that the market will return to “fair value.” If there is a short-term bounce to anywhere near your forecast of 4000, sell up, take profit and move on. It is that simple if you do your research.

Step 8Abiding by your entry rules

As we mentioned earlier in this article, whether through boredom, over-exuberance, or a huge ego, it can be tempting to bend your own rules and ignore some conditions on investment. You should base your investment decisions on the quality of the buy signal. Don’t judge it by the number of trades carried out. Many day traders will trade multiple times and bank relatively small profits, which can accumulate to a hefty return. However, even those trading regularly will still have their own “entry rules.”

There is also a common misconception that, for example, S&P 500 E-mini futures are short-term investment instruments. Many traders could indeed be in and out of these futures contracts multiple times daily. However, they also offer a more extended investment play via the different series of futures contracts available.

Interestingly, while many people focus on entry points and entry conditions, it is just as important to know when to sell. We have all been there. Don’t hold a falling investment just because of our “ego.” You will often find that the hardest thing to do is to take a loss. If you stick by the investment sale criteria/conditions in your trading plan, this should work when crystallizing a loss as well as making a profit.

Step 9Tracking your investment decisions

The best traders in the world are those who never stop learning, those who never believe they know it all. If you take a step back and look from a distance, investment markets, any investment market, can be described as an “information exchange.” Information is entering the exchange every second of every day as investors buy and sell. Ultimately, this will dictate the level of an index, individual stock, or any other type of investment.

There will be occasions where the market simply “gets it wrong,” but on the whole, this massive information exchange is relatively efficient. Whether you were slow in taking a profit or slow in taking a loss, learn by your mistakes. It is always useful to look back over your paperwork and see why you made wrong and right decisions. If you broke your own rules, whether you made a profit or loss, it is essential to know what drove you to take that decision. Why did you veer away from your proven trading plan? Is it time to adjust your trading plan and adapt to changing markets?

Step 10Keep track of your performance

In a similar fashion to those who bet on horse racing, some investors tend to “remember” their profitable trades and “forget” losing trades. This bias is a dangerous precedent to set for yourself and one which can have enormous consequences. Even if your investments have performed relatively well, securing a good return, there may be situations when you have taken an undue risk. On the back of a loss, it is typical for many investors to up the ante and look to “win big next time.”

Whether you made a significant profit or significant loss on your last trade, don’t let that influence your next trade. We learn as much, if not more, from our financial losses as we do from our financial gains. Investors feel the pain from financial losses in the pocket and in their ego, which can take a  hit. So keep constant track of your investments, how they performed, and whether your trading plan sticks you.

Regular reviews of your investment performance may identify specific tweaks and changes you could make to your trading plan going forward. You tend to find that these changes are relatively few and far between, assuming you have done your homework in the first place. However, markets change, trends change, as do investor aspirations. Don’t get left behind.

Final Thoughts

Those who think you can create a trading plan overnight may be in for a big surprise and possibly many financial losses. While there are common elements to all trading plans, your plan must be specific to your situation, skills, and future goals. Once you confirm your trading plan, it is time to take that leap of faith.

Perhaps the biggest challenge you will have is abiding by your trading plan. It’s tempting to bend the rules or ignoring certain conditions. Mastering it is a big step on the road to quality over quantity approach to investment. Limit your downside, maximize your upside, ensure a balance between risk and return, and only invest when you feel comfortable. When you start investing because you “feel you have to,” is when you’ll lose your profit to the market. Not a good idea!