Building A Complete Trading Plan
A Blueprint For Your Trading
by Vadym Graifer
The active management of a trading account should be treated as a business and requires a complete trading plan. Here's how to build one.
A trading plan is often described as a document with setups that a trader intends to trade and details of entry and exit. In best-case scenarios, rules of money management are added, instructing a trader on how to act during a trade. While such a plan is better than a haphazard approach, it is not nearly enough for a beginning trader who needs to build an entire trading method from scratch.
THE COMPLETE PLAN
The most common shortcomings of an incomplete trading plan are:
Not many would venture into a new business without a thoroughly documented business plan. The active management of your investment or trading account is a business and requires a complete trading plan, with each of its elements aligned and interconnected.
- Lack of foundation in terms of understanding the market inefficiencies that a trader intends to exploit
- Lack of logical connections between different aspects of trading, mismatch between method, time frame, and tools, and
- Lack of a well thought-out idea on how to progress through the learning curve with minimal risk.
A trading plan outlines your entire approach to the stock market (or any other market for that matter, be it futures or currencies). It matches your actions and objectives, risk tolerance, individual circumstances, and personality traits. It defines your tools, states criteria for entry and exits, establishes your general approach, and outlines procedures to realize your goals. Finally, it outlines your course of action in a disciplined manner intended to preserve your hard-earned money from excessive risk.
To structure your trading plan properly, start with generalities, moving to details, aligning all elements of your plan. Skipping these first steps is like building the walls without a proper foundation -- in other words, a house of cards.
...Continued in the January 2006 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the January 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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