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5 Steps To Building An Effective Trading Plan

Kyle DennisKyle Dennis ·

Successful people know that luck has very little to do with it. In fact, many will tell you that they planned to succeed. Believe it or not, as random as the stock market is, planning is essential to your results.

I remember once, talking to a new trader about Apple stock. She loved the company, and it was the only stock that interested her in trading. Despite trading it nearly every day, she never recorded her progress, and kept repeating the same mistakes, over, and over, again.

Literally it was like the definition of insanity.

Now, I’m not sure if she ended taking up any of my advice, but I hope you do. That said, here are 5 steps to building a top-notch trading plan.

1. Be Realistic

Look, I get it, you are in this game for the money, there is nothing wrong for saying that. However, you should keep it real.

For example:

How much time do you have to dedicate to trading?

Does your allotted time match your trading strategy?

How much capital are you working with?

Will your account size affect the type of trades you take?

In many ways, your trading plan should look like a traditional business plan, outlining your objective, strengths and weaknesses, and what your goals are in order to grow as a trader.

Focus on developing a winning strategy, and the money should follow.  It took me three years of consistent returns before I made the plunge to becoming a full-time trader.

Without a solid plan, I never would have gotten to this stage.

Now, after you have answered what your limitations are, it’s time to start developing a more detailed trading plan.

2. Trade Your Best Setups

In order to know what your best type of trades are, keep detailed records of your trading. For example, instead of assuming you are an awesome trader in Apple, what do your trading results tell you? In addition, are there particular setups that work better when trading that stock? Does the market need to be up or down for the trade to work most of the time?

With a market cap of nearly $9 billion, Domino’s is making a boatload of money selling Pizza’s. However, McDonald’s could easily get into the pizza business. After all, they have a market cap that surpasses $100 billion. But that is not it’s niche. Sure, McDonald’s will tinker with it’s menu, but it’s stayed true to it’s core audience throughout the years.

Once you’ve recorded enough trading stats on yourself, pick out what your strengths are, and then focus on getting bigger and better at trading them. Of course, that doesn’t mean you shouldn’t be open to new ideas. Not at all. If you are going to experiment new ideas, make sure you do it on a small scale.

Source: Listverse

 It turns out that this experiment didn’t work for McDonald’s, luckily, it didn’t interrupt its core business.

3. Track Emotional State & Well Being

Got in a fight with your partner? Not getting enough sleep? Eating like crap, and not exercising?

All of these things can affect the way we make decisions in the market. If you know that you don’t trade well after a heavy night of drinking, then take the day off from trading, and spend that time doing research or reviewing.

If some financial issue in your life is bothering and distracting you, then maybe trading that day isn’t a good thing. You see, in it’s simplest form, trading is just high-level decision making. Make sure that you are physically and emotionally ready for the day.

4. Set Goals

Your goals should be to trade bigger and get better as a trader. However, you should stick to things that you can control. For example, developing a plan for your individual trades, identifying what your entry and exit points will be, and honoring them.

A goal could be to stick to your risk management plan. Another goal could be to only trade the setups that provide the greatest edge. Maybe, you need to get more sleep, or stop trading after a certain time.

The idea here is to put your attention on goals that you have control over. Just make sure you write them down, recite them, and have them somewhere so that you can be reminded of them.

5. Do Your Homework and Be Prepared

Before the start of the session, traders like Kyle Dennis and Jason Bond will send members of their trading services a watch list, giving everyone an idea of what to look out for, the potential catalyst, along with entry levels and exit points.

We could all learn a thing or two from the way that they prepare.

For example, if you are planning to trade a stock that is about to announce earnings. It pays to know off hand what the street is expecting for EPS, revenues, and guidance. You don’t want to be a deer in headlights, trying to figure out if the news is good or bad, while trying to trade the stock in the after hours when it has dollar wide spreads. That is a disaster in the making.

It’s when you step outside your strengths, you start making shaky decisions.

In Summary

Developing into a consistent trader, one that is profitable and has a defined edge, takes time. That said, develop a plan and stick too it. Stop guessing on whether what your strengths and weaknesses are, and start relying on your notes and data.

Interested in more…learn from me here!

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