How to Create a Trading Plan (Trading System)
A trading plan is a series of steps you can follow to approach the market with a clear, structured process. It defines what you will do, why you are doing it. We prefer to call this a trading system.
Why You Need a Trading System
To be consistently profitable, you need both profitability and consistency.
Profitability means over a large sample size of trades, you're in profit. Consistency is about having a structured, repeatable approach making sure you continue to be profitable. Without consistency, profitability is just luck.
So, why do you need a trading system?
- Consistency: Without a system, traders often analyse the same situation differently each time as they’re influenced by cognitive biases. A system dictates how you analyse information, leading to consistent analysis.
- Efficiency: Aimlessly analysing loads of different markets wastes time and energy. A system helps you focus on the best opportunities, reducing opportunity cost—the time spent on less promising trades at the expense of better ones. A system focuses your effort where it matters most.
- Improvement: With a consistent approach, it's easier to identify problems and areas to improve. Without it, you won’t know what to fix, leading to frustration. A system provides specific steps, making it easier to pinpoint what to refine for better results.
How to Structure a Trading System
A system is essentially a list of steps you follow each time you approach the markets. For each step, you need to define what you’re doing and why you’re doing it. For example:
- Step 1: What are you doing? Why are you doing it?
- Step 2: What are you doing? Why are you doing it?
These steps should be consistent, but there is a third element focusing on how you’ll achieve each step. The "how" is the strategy, which can vary based on market conditions.
Breaking Down the Steps into Sections
To make the process easier you can break the steps down into the separate sections we go through with our analysis.
We've arranged them into a funnel, starting with many markets and narrowing down to specific trade opportunities. You don't need to go through each phase every time, and you can stop after any phase if you know there won't be any opportunities.
- Market Selection: This is your process for finding the right market to trade. While you already have some selection process, these steps help you filter for the best trades in that trading session. The goal is to find a market where potential outcomes and probabilities are clear..
- Primary Analysis: In this phase, you assess past activity and the current situation. By analysing the market structure and characteristics, we can identify areas likely to cause changes in activity.
- Secondary Analysis: Now, anticipate what may happen next by identifying first and second-order potential outcomes. The goal is to find positive expectancy trades based on the primary analysis. If there aren’t any suitable opportunities, set alerts and revisit later.
- Trade Entry: Once an opportunity is found, you can plan your trade. This includes planning the stop loss, position sizes, and deciding on trade management actions depending on the outcomes. The focus here is on structuring the trade rather than finding the entry - we’ve already done that.
- Trade Management: After the trade is open, keep analysing the market and updating your analysis . Adjust your position, manage risks, and move the stop loss as necessary. Keep updating your probabilities and strategising until you reach the exit.
You can now take this approach and apply it to your very own trading system.