By now you should have your game plan ready and be much more certain about who you are as a trader, what your trading system is all about and what defines your edge. Today, we will learn about the trading plan and how to utilize it in your daily trading.
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The purpose of a trading plan
The trading plan is your daily companion as a trader and it guides you through your trading day. In your trading plan you map out potential trade ideas, you create scenarios for price movements, come up with if-then scenarios and what has to happen before you enter a trade.
A trading plan is like a battle plan that prepares you for your trading sessions and helps you eliminate the uncertainty that many traders often feel during their trading. How often did you find yourself in trades you don’t want to be in? How many times did you enter a trade, but not all entry criteria were met and you ended up with a loss? And how often did you miss trades because you forgot about a setup? That’s what your trading plan will help you with.
By following this link you can download our trading plan template.
You will find a video at the end of this lesson that walks you through the Edgewonk trading plan and explains how to use it in your trading.
Now you might think, ”I am a day trader, I can’t plan out every trade before taking it because things change and happen so fast,” that is not true. If you are a day trader, simply work out different plans before you start your day and be clear where and when to trade: “If price does this, I do that”, “if price, however, does this, I will do that instead – or stay out”, and so on. That way you will have plans for different scenarios and if the price does something that you did not account for, then you simply stay on the sidelines and wait for your edge. Knowing when to trade is just as important as knowing when not to trade.
If you are a longer-term swing-trader, your trading plan is among the most important tools because you have more time to analyze and plan your next move.
Tips for preparing your trading plan
When you are working a day job, the ideal time to create a trading plan is during your days off over the weekend. Here is how your trading routine around your trading plan could look like:
Usually, Sunday is the ideal day when it comes to creating your trading plan for the coming week. You simply start your charting software, you look for potential setups on the instruments you trade, you mark high-interest price levels (usually support/resistance, supply/demand, round numbers, swing highs/lows, etc). Ideally, your Sunday analysis comes in the form of a top-down market analysis where you start on the weekly or daily time frame and then work your way lower.
After you have prepared your charts, you pull up your trading plan template and write down what you will do at case price does this, or this, or this. You write down where you want to enter, where you want to exit, and under which circumstances your plan will be nullified. We also recommend using price alerts so that you don’t miss important price movements at the levels you have identified earlier.
The charts that don’t offer any interesting and potential setups you can avoid for the next few days and eliminate a lot of noise from your daily trading. This will make your trading week more structured and you can avoid the time and energy-consuming “time-frame-flipping” habit.
Using your trading plan during the week
When you start your trading week, you check your charts in order to see if anything has happened that would signal an entry based on your trading plan. But don’t just rush it – always take your time when you are analyzing your charts and executing your trades. There is a great quote from chess grandmaster Magnus Carlsen:
“I normally do what my intuition tells me to do. Most of the time spent thinking is just to double-check.”
During the week, you keep adjusting your trading plan based on the price action. You write new plans when a new scenario is presenting itself, you cross-off scenarios that got canceled and so keep your trading plans current. The power of price alerts really comes into play here: setting price alerts at levels that need your attention is a huge time-saver and can help you reduce screen-time and it makes sure that you don’t miss the scenarios you laid out.
As the week goes on, you repeat the steps every day. Then, after you finish up your trading on Friday afternoon, you go over your trading with our Friday checklist that we will introduce later during this module.
And that’s basically it. Sounds very convenient, doesn’t it? By utilizing a trading plan, you eliminate the stress, no more random chart-flipping – just a structured plan, and your execution of it. This is what organized, professional trading looks like.
In this week’s challenge, you should create your first trading plan and see how helpful it is during your live trading. Don’t get discouraged if your trading plan doesn’t seem to offer any help right away; creating the “perfect” trading plan for your purposes is a trial and error process and it takes time to figure out what works for you.