Ten steps to building a winning trading plan

So, you have decided to trade. Now, you want to know how to do it well.

But in the absence of either instinctive genius or an enormous helping of luck, having no trading plan is an almost certain guarantee of failure.

First rule: know yourself

Your trading plan will set out the basis on which you formulate those views and act on them. It will be your shield against chaotic trading and consequent losses. Starting to trade without a trading plan is about as advisable as taking off in an aircraft without a flight plan.

So what should be the first item on this all-important founding document of your trading career? Before even thinking about what to trade, it would be advisable to frankly assess your likely strengths and weaknesses as a trader, so the first step should be to examine your character and characteristics to weigh up what sort of trading would suit you best.

The popular image of the trader is of an adrenalin junkie frantically piling in and out of market positions. Maybe that style would suit you. Or perhaps you are temperamentally inclined to a cool-headed trading strategy based on in-depth research, one in which you can have confidence.

This takes us to the second step, which is to do your homework – yes, even if you favour the abovementioned manic trading style. Remember, CFD trading, and in fact all trading to an extent, is about taking a view. But where do your views come from and on what are they based?

Choose your assets

In parallel with researching the trading opportunities to which you are drawn, to see if they make sense, you ought also to be deciding the level of risk that you will be prepared to take on. The third step is all about building a winning trading strategy. In a sense, this is complementary to the first step, in that setting the risk level depends on the same sort of self-awareness as does assessing your likely trading skills.

Your risk level can be altered over time, in light of experience, but ought not to be simply abandoned for the thrill of the chase that may go badly wrong. It will inform how you go about the fourth step, which is to select the assets and the trades that you will be conducting. Your risk strategy will tell you not only the types of assets to which you will allocate funds but also the percentage of your available funds that can be apportioned to each trade.

A critical fifth step is to set a stop/loss level for each trade, and stick to it. In trading jargon, this is called “limiting your downside”, and gives effect to a key trading imperative, to cut losses. Many traders use a stop/loss also to protect profits, in that the stop/loss level is set as a percentage not of the purchase price but of the highest price ever achieved by the asset in question.

In other words, it is lifted up in the slipstream of a rising asset.

Talk of protecting profits takes us to the sixth step, which is to decide what it is you want to achieve with regard to each trade in terms of profit and thus set the level at which you will exit the trade. This is a useful corrective to the danger of becoming greedy and staying too long in a position that may well be losing momentum.

Good money management

There was an old stock-market saying that, once someone has made the profit they had hoped for, they should sell the stock – and not look at the price for six months, in case it continued to soar away, causing bitter regret.

No exit would be possible, of course, without an entry, so our seventh step covers the criteria for buying into each trade in the first place. 

Our eighth step may sound obvious, but you may be surprised how often it is overlooked. Embedded in your trading plan must be a sound strategy for money management. Without this, you run the danger of not only lacking the cash with which to seize trading opportunities but also of being uncertain as to how well your trades are performing.

A ninth step, essential before you start trading, is to decide your criteria for success for your overall trading, in much the same way as our sixth step set the success level for individual trades. What are your goals? What will success look like?

Finally, our tenth step would be to examine all the “soft” factors that may affect that first trade, and all those that follow. Are you nervous? Or, what is probably worse, distracted? Get your trading environment right, in terms of a lack of distractions and a reasonable level of physical comfort, and you will be better placed to trade successfully.

As for nerves, there is a lot to be said for taking a deep breath and counting to ten.

To sum up, all these ten steps aim to root you in a robust trading plan that will give you the very best chance of success. Stick to the plan, while adapting it in light of experience. Remember – the plan is your friend and colleague in your trading career.

Good luck!