Most people treat trading like a hobby, which is often leads to poor outcomes A hobby is something you do for fun when you have free time. A business is something you do with a plan, a structure, and clear risk expectations. If you approach the market without a plan, you are not a trader. You are providing an opportunity for someone who is.
A trading plan is not a vague notion of “buying low and selling high.” It is a personal document you sign with yourself. It is a set of hard rules that dictates exactly what you will do when the market inevitably punches you in the face. Without it, you are navigating a storm with a map drawn on a napkin.
Here is how to build a plan that actually works, stripped of the motivational fluff.
1. Define Your Identity (The “Who Am I?” Phase)
Before you look at a chart, you need to look in the mirror. Who are you as a trader? This is not a philosophical question. It is a logistical one.
Are you a scalper who thrives on adrenaline and can stare at a screen for four hours without blinking? Are you a swing trader who has a day job and can only check the charts in the evening? Are you a trend follower who is comfortable accepting a series of small losses in exchange for occasional larger outcomes at the end of the year for example??
Your plan must match your lifestyle and your psychology. If you try to scalp while working a 9-to-5 job, execution becomes unrealistic. . If you try to trend-follow but have no patience, you may exit every winning trade too early. Define your timeframe, your preferred asset class, and your emotional tolerance for pain. If you don’t know who you are, the market is an expensive place to find out.
2. The Setup: Your Weapon of Choice
This is the technical core of the plan. What exactly are you looking for? A trading plan does not say “I look for good opportunities.” It says, “I buy when the price is above the 200-day moving average, pulls back to the 20-day moving average, and prints a bullish engulfing candle.”
You need to define your setup with the precision of a computer code.
- The Trend: How do you define the market direction? (e.g., Higher highs/higher lows, moving averages).
- The Trigger: What specific event tells you to enter? (e.g., A breakout, a specific candlestick pattern, an indicator crossover).
- The Filter: What conditions must be present to make the trade valid? (e.g., Volume must be 20% above average, RSI must be below 70).
If you cannot write your setup on a post-it note, it is too complicated. Complex systems can fail under stress. Simple systems tend to survive.
3. Risk Management: The Survival Manual
This is the section that nobody wants to write, but it is the only section that matters. How much are you prepared to risk if a trade does not work as expected?
Your plan must have hard numbers.
- Risk Per Trade: Many experienced traders choose to risk no more than 1-2% of your account on a single trade. This is the industry standard for a reason. It prevents a bad week from becoming a career-ending event.
- Max Daily Loss: At what point do you turn off the computer? If losses reach a predefined daily limit, let’s say 5%, of your account in a day, the decision-making ability can be compromised. You are no longer trading; you are revenge-trading. Walk away.
- Stop-Loss Placement: Where does your stop go? It should be based on the chart, not your wallet. A stop-loss is placed at the point where your trade thesis is invalid.. If that point represents too much risk, you may need to consider reducing your position size. You do not move the stop.
4. The Exit Strategy: Getting Paid
Entering a trade is easy. Exiting is where the money is made or lost. Most traders spend most of their time thinking about entries and less thinking about exits. This is backwards.
Your plan must dictate exactly how you will manage exits.
- Technical Targets: Are you selling at the next resistance level? At a Fibonacci extension?
- Trailing Stops: Are you going to trail your stop-loss behind the price to catch a trend? If so, what mechanism will you use? (e.g., A moving average, previous swing lows).
- Time Exits: If the trade does nothing for three days, do you close it? Capital in inactive trades limits flexibility.
Live trades trigger emotion. Plans are written in logic. The edge comes from listening to the plan, not the feeling. .
5. The Review Process: The Feedback Loop
A trading plan is a living document. It needs to be reviewed regularly. This can be a boring part of trading, but it is one of the most important.
At the end of every week or month, you should review your trades. Did you follow the plan? If you lost money but followed the plan perfectly, that is a “good loss.” It is part of operating in the markets. . If you made money but broke your rules, that is a “problematic win.” This can reinforce bad habits.
You need to track your metrics. What is your win rate? What is your average winner versus your average loser? Which setups are working and which are burning cash? Without data, you are just guessing.
The Contract
Building a trading plan is an act of discipline. It is admitting that you are flawed, emotional, and prone to making impulsive decisions under pressure. It is creating a structure to protect you from yourself.
The market is a chaos machine. It does not care about your feelings, your rent money, or your ego. It tends to reward disciplined behaviour and penalise careless behaviour. Your trading plan is your only shield. Write it down. Sign it. Stick to it. Or find a less costly hobby.
Final Reminder: Risk Never Sleeps
Heads up: Trading is risky. This is only educational information, not an investment advice.