Anatomy of a Trading Plan

CryptoCred
Apr 22 · 6 min read

Introduction

The aim of this article is to give you a rough idea of at least these three things:

  1. What a trading plan is
  2. Why a trading plan may be useful
  3. What a trading plan might look like

Trading Plan: What Is It?

A trading plan is an outline of how a trader will employ their trading system in the markets they trade over a given period of time.

Another way to think about it is the following: a trading plan is essentially the real-time application of one’s trading system.

Very simple example: Bob’s trading system tells him to sell rounded retests of broken, 3-touch support levels on the H1 time frame. Bob scans through the markets he trades, and notices that price is approaching one such level that meets the requirements perfectly. Bob knows his system dictates that he’s a seller at that level, so he starts to plan his involvement (entry price/trigger, stop loss, target, risk, and so on).

In short, a trading plan is essentially as the name would suggest: it’s a plan covering the setups that have formed or are in the process of forming, and how to act on them. A trading plan allows you to move from a system of rules and guidelines to actually taking trades.

Trading Plan Utility

The utility of a trading plan should hopefully be self-evident.

In case it isn’t, here’s a short list of how a trading plan might improve your trading:

  1. Allows traders to generate live trade ideas derived from the rules of their trading system
  2. Allows traders to confidently get involved in predetermined areas and thus avoid ‘chasing’ the market
  3. Allows traders to get involved in the market with predetermined levels and risk even if initial directional bias was incorrect
  4. Facilitates smoother record-keeping
  5. Improves organisation and discipline in the trading process

I mean the premise is quite simple, really. You’ll forgive the reductionist false dilemma, but one can either a) wake up whenever, scan the charts, eye something half-decent, punt it at market and see what happens; or b) act on a clearly-defined trading plan in predetermined areas/at predetermined structures.

Point 2 is particularly prescient, and this tweet comes to mind.

After some reasonably elementary technical education and time spent at the charts, many traders will be able to look at a chart of the instrument they trade and outline some reasonably good areas to trade or structures that might give rise to a setup.

Two things come to mind:

  1. As per the tweet, it is very easy to lose sight of the bigger picture in the absence of a trading plan. For example: after a breakdown with a clear lower low and key support being smashed, while looking at all the red candles one might reasonably think to sell rallies. However, once price actually starts rallying and printing green candles, it is incredibly easy to forget that rallies are for selling or, even worse, start chasing the upside. A trading plan will ensure that you keep lower time frame noise or corrective moves in the appropriate context.
  2. Unfortunately, merely charting a trader does not make. Especially on the crypto Twitter side of things, an overwhelming number of ‘traders’ (a misnomer; the term ‘analyst’ is far more accurate) are exceptional at calling the market but absolutely hopeless at actually trading it. A trading plan will ensure that one’s accurate market analyses can actually translate to concrete, actionable trades.

I hope I’ve made the case for a trading plan somewhat clear. It’s not limited to the benefits outlined, but I imagine they are applicable to most of the people reading this article.

Trading Plan Substance

I should note from the outset that I treat one’s trading system, trading journal, and trading plan as three separate entities.

Trading System: Rules governing one’s approaching to trading; the theoretical framework

Trading Journal: Record of trades that are taking/have taken place; the ledger

Trading Plan: Outline of specific rules of engagement for any given time period; the practical implementation of the trading system

As with any trading system, a trading plan can also vary in the degree of flexibility that it affords.

Trader A might have a very prescriptive trading plan with specific levels, entry triggers, risk, stop placement, targets, and so on whereas Trader B might have some scribbles about direction, interesting areas to look out for, and leave the rest to discretion.

This is largely down to individual preference and seeing what works better for you. What I will mention, just as in my article on trading systems (strongly recommended), is that newer traders would be well-served to err on the conservative side whereas more experienced traders can often afford more discretion.

Here’s a basic trading plan template you can use to get started:

Pre-market routine:

This section should outline your normal ‘rituals’ before engaging whichever session you happen to trade first (London Open for most readers, I imagine). This is quite personal but generally stuff like marking up charts, scanning through news, opening the relevant data feeds, checking existing orders with exchange/broker, and so on are quite relevant.

Post-market routine:

This section should outline how you unwind after the day’s trading is done. I especially urge you to include a reminder to log the day in your trading journal.

Market:

Self-explanatory: make a note of the market you’re trading.

Directional Bias:

Quite a nuanced topic, but in short this section should inform you whether you have a directional bias in this market i.e. buying dips or selling rallies.

This can be based on a higher time frame and be fixed when going into the day e.g. last daily candle was a bearish pattern so you go into the new day looking to sell rallies, but it can also be fluid and based on price behaviour on the day e.g. price gets bought up below previous day’s low and breaks higher so you buy pullbacks for the remainder of the session or day.

This section can also be used to outline levels for bias that will allow you to quickly shift your view and cut your losers early if the market tells you to e.g. intraday bullish bias as long as price holds [price level/reference point] → bias turns bearish below that.

Fundamentals/News:

Self-explanatory: news related to the market you’re trading, when it’s due, how significant it is, and so on.

Expectation:

This section should contain some jottings on what you expect the market to do during the time period that you’re trading (usually one day).

It’s important not to marry this expectation; there’s no use in trying to impose your view on the market. With that said, I’ve personally found it helpful if I write out my forecast and then see whether I was correct at the end of the day. This is helpful in two ways. First, I get an idea (after long enough) of whether I am ‘in sync’ with a certain market and have a better feel for it. Second, I’ve noticed that if my general forecast starts to play out, the likelihood of my setups doing well is increased.

Price level(s):

Self-explanatory: the price levels where the structures you trade have formed/are likely to form.

Setup:

The name of the setup you will trade, as described in your trading system.

Risk:

The % of your capital at risk, how it will be scaled in, any notes on compounding, number of contracts, and so on all outlined here. It’s important to be thorough and strict with this section so you don’t get balls deep on the first spike and spend the rest of the day underwater.

Invalidation:

Where the setup you are trading is technically invalidated. Also where most systems will mandate that one’s protective stop is placed. Can also be used to complement directional bias.

Reward:

Target(s) for the trade, trouble areas, areas to scale out of the position. Essentially all things related to profit-taking.

Alternatively, if you’re not terribly keen on that template and want a ready-to-go Excel sheet, the ledge Tom Dante has one available on his excellent website. You can download it here.

Conclusion

In short: a trading plan gives effect to your trading system on a day-to-day basis and keeps you disciplined in its execution.

A plan doesn’t need to outline every single move to the last breath. It can be as prescriptive or as loose as you’d like; as long as it fulfils the purpose of getting you to execute your trading system properly.

As mentioned, I strongly recommend you read my article on trading systems to complement this piece.

Thanks for reading!

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