Developing a Trading Plan: Balancing Flexibility with Disciplined Habits

 In the dynamic world of trading, flexibility and speed to react to changes is paramount. It’s necessary to avoid becoming ego-invested in your trades, as this can cloud judgement and potentially lead to unfavourable decisions. But besides being flexible in your trades, there’s also a need to ensure you’re on the right track, to meet the trading objectives you set out to achieve. That’s where a trading plan comes in handy.  

To work towards establishing a trading plan that works for you, traders should consider adopting a set of good habits. A helpful starting point is to follow a well-structured trading plan designed to guide traders towards more effective and unbiased decision-making. This approach contributes to a more disciplined and rational trading mindset that allows you to let go of ineffective trade ideas.  

So let’s delve into what exactly constitutes a trading plan and how it can be a game-changer in your trading journey. 

Key Points 

• A trading plan is important for managing risk and achieving consistency in trading by setting clear parameters for trade entry and exit, risk levels, and responses to market changes, thus minimising impulsive decisions driven by emotions. 
• Utilising a trading plan helps in managing emotional triggers during trading, improving decision-making, and learning from mistakes by adhering to predefined strategies and goals. 
• The implementation of market orders and predefined orders, such as stop loss and take profit, within a trading plan allows for rapid execution and effective risk management, ensuring traders limit their losses and secure returns according to set rules. 

What is a Trading Plan? 

A trading plan is essentially a comprehensive roadmap for trade execution, detailing specific strategies, goals, and rules. It’s a personalised framework that guides traders in making informed decisions, managing risks, and achieving consistency. The essence of a trading plan lies in its ability to help minimise impulsive, emotion-driven actions, replacing them with well-thought-out moves based on objective analysis.  

It sets clear parameters for when to enter and exit trades, how much risk to take, and how to respond to market changes. By adhering to a well-defined plan, traders can maintain focus, track their progress, and continuously refine their approach based on real market experiences and outcomes. 

Why use a Trading Plan? 

One of the main reasons for using a trading plan is to help manage risk. Following this plan and the risk management procedures embedded in it will hopefully cut out any adverse emotions during your trading day.  

The emotional states that you can find yourself in may have a major influence on how you react to certain events and situations. A trading plan can sidestep some of these negative triggers which can put you on the path towards long-term success. Indeed, constantly sticking to your plan will also tell you where you have made mistakes and so where you can improve.  

“Every battle is won before it is fought”   

Many traders like to refer to the Chinese military general, Sun Tzu’s famous line which suggests that planning and strategy win wars, and not the battles. It is the planning ahead, the scenario analysis, which pays dividends in the end and can often mean the difference between success and failure.   

Planning the Trade and Trade the Plan 

Knowing what price you are willing to pay and at what price you will sell is a rule which simplifies trading and allows you to measure the expected returns versus the probability of the instrument hitting its target. This can determine if you execute the trade. You can also take this further and calculate your risk-reward ratio which will define your trade risk.   

Inexperienced traders may often enter the market without an understanding of these price levels. They will make more knee-jerk, emotional decisions and may then hold onto losing trades much longer than they should or cut out winners too quickly and without any predefined analysis.   

Planning is a simple step in trading and like any homework, is hugely worthwhile in the long run.   

For example:   

• A trader knows that the US non-farm payrolls report always released on the first Friday of the month is generally a big deal for markets.   
• As volatility is expected, all good traders will understand beforehand what the markets are forecasting for the data, and more importantly, how markets should react if the figures are in line, beat or miss estimates.  
• The impact on existing positions will also need to be analysed before the release, so that the trader can either hedge, reduce or even add to these positions.   

With the foundation of executing a trading plan in place, the next step involves mastering the tools at your disposal, such as market orders, to effectively execute your strategy. 

Using Market Orders 

Market orders play a role in the execution of a trading plan, offering traders the ability to buy or sell securities promptly at the current market price. This type of order is particularly useful in fast-paced market environments where rapid execution is more important than the exact entry or exit price. While market orders guarantee execution, they do not guarantee the price, making them a double-edged sword in volatile markets.  

For a trader following a well-structured trading plan, understanding when to use market orders is key. They are best utilised in situations where moving quickly outweighs the potential cost of slippage, which is the difference between the expected price of a trade and the price at which the trade is actually executed. 

Different types of predefined orders   

The use of different orders in the trading plan is to take away indecision and emotion in the moment. These risk management tools help to execute trades at specific price levels which means traders can move on to the next trade, automatically and effectively.   

Stop Loss Orders  

A stop loss is a fixed amount of risk that a trader is prepared to accept with each trade. The stop loss can be either a dollar amount or percentage, but either way it controls the trader’s exposure during a trade.   

• If you are long, the stop loss level will be below the current market price.   
• If you are short, the stop loss must be placed above the entry level.  

Using an order like this means we know for certain that we will only lose a certain amount on any given trade. Ignoring a stop loss, even if it leads to a winning trade, is bad practice. Exiting with a stop loss, and so having a losing trade, is generally more acceptable if it falls within the trading plan’s rules.   

Of course, while the preference is to exit all trades with a profit, this is not generally realistic. Using a protective stop loss helps ensure that your losses and your risk are limited.   

Taking Profit orders   

A common mistake for less experienced traders is failing to recognise the point at which to take profits, as more often than not, those traders are simply enjoying the ride, watching their account balance rise and taking their eye off the ball!  

Similar to the stop-loss order and before entering the actual position, a competent trader should have determined where they will exit the trade at a certain price. Often this is when additional upside is seen as limited given the risks or perhaps the extended nature of price action.   

For example, this could be due to that level being near a strong support zone if you are short. On the flip side, a trader will set a Take Profit order above the current market price if they are long as it may be near a well-known resistance area. This order will be executed automatically when the price hits the specified profit target.  

Where to set Stop Loss and Take Profit Orders  

Many technical traders use charts and price action to place these types of orders near support and resistance trendlines. ‘History repeats itself’ is the backbone of technical analysis and can be applied here as the market will often react to these important price points. Previous highs and lows that occurred on significant, above-average volume could also be used.   

Other tips include:  

• Adjusting the stop loss to the market’s volatility, so not just a predefined number of pips away from entry. If prices in one currency pair do not move as much as another pair you are trading, your stop loss could be tightened.   

• If using moving averages, longer-term indicators may reduce the chance that a meaningless price swing will trigger your stop loss order.  

• Adjusting moving averages to match target price ranges; for example, longer targets could use longer moving averages to reduce the number of signals generated.  

A trading plan organises a trader, defines specific trading rules and personal goals. It can act as a track record as every trader, no matter what level of experience and expertise, learns from both success and failure.   

Increasing your knowledge with a robust trading plan and also making improvements along the way will be beneficial to achieving your long-term objectives.   

Conclusion 

Developing a robust trading plan is an essential step for any trader seeking to navigate the complex world of financial markets. It provides a structured approach to decision-making, helping to manage risk and minimise the influence of emotions.  

By continuously refining your trading plan based on real-world experiences, traders not only improve their strategies but also move closer to achieving their long-term financial goals. This disciplined approach to trading, guided by a well-crafted plan, is important when facing the ever-changing landscape of trading. 

Are you prepared to implement your trading plan? Begin your trading journey today by signing up for a live account with Vantage. Take advantage of the suite of advanced tools, including indicators, pattern recognition, and real-time market data, all on a platform designed for precise and swift execution. Start trading now and navigate the markets with confidence and efficiency.  

All the information or commentary in this document is published in good faith and for general educational & information purposes only. Vantage Global Prime LLP does not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information you find in this document, is strictly at your own risk, and Vantage Global Prime LLP will not be liable for any losses and/or damages incurred.