Developing a Trading Plan: Comprehensive Guide

What is a Trading Plan?

A trading plan is a comprehensive framework that guides all trading activities, ensuring consistent and disciplined trading practices. It includes your trading goals, strategies, risk management, and evaluation methods. A well-structured trading plan answers the “what, when, how” of your trading activities.

Things you need to consider

Why Do You Want to Trade?

First of all – understanding your motivations and setting clear expectations is crucial in developing a trading plan.

Making a Living: Are you aiming to trade as your primary source of income?
Some Extra Money: Are you trading to earn supplemental income?
Skill Development: Are you trading to enhance your skills and knowledge?

Time Commitment

Your lifestyle and daily schedule largely define how much time you can afford to dedicate to trading activities. Is it realistic to do this during your regular job? Is it a good idea to trade during your working hours? Do you have time in the morning before your regular job, or in the evening after putting your children to bed?

Analysis: How much time can you dedicate to market analysis?
Monitoring and Execution: How often can you monitor the markets, and how quickly can you execute trades when opportunities arise?
Journaling: Can you consistently document your trades?
Evaluation and Learning: How often will you review your performance and seek improvement?

Risk Tolerance

Evaluate how much risk you are willing to take. This will influence your trading style and the instruments you choose.

Experience: Do you already have some experience in trading or investing? What suits you better – having a high win rate with smaller profits or win just from time to time but if so, the profit is big.
Financial Situation: How much do you have in savings? Would potential losses significantly impact your lifestyle?

Understanding and managing your risk is crucial. By the way, this is why the FTMO Challenge exists — to help traders keep their expenses and losses under control while testing, refining, and utilizing their trading strategies in real market conditions, with real emotions of trading.

What is your unique strength?

Consider Your Personal Qualities. Reflect on the personal attributes you can bring to your trading approach. By cultivating qualities like diligence, the ability to learn from mistakes, patience, discipline, emotional control, and adaptability, you can enhance your trading performance and increase your chances of achieving long-term success.

Skill level

Assess your current trading skills and knowledge objectively. Is it in line with the trading style you would like to trade? For example, most traders rely on technical analysis based on historical price movements or its combination with fundamental analysis. At a bare minimum, you should have objective methods for defining support and resistance levels, trends, and market congestions. This includes at least a few tens of hours of observing the markets, both live and through backtesting.

Your Lifestyle

Assess your lifestyle to determine how much time you can realistically devote to trading. Your available time will help dictate your trading style:

Scalping: Requires constant attention and quick decision-making. Suitable for those who can dedicate significant time daily.
Intraday Trading: Involves opening and closing trades within the same day. Less intense than scalping, but still requires regular monitoring.
Swing Trading: Trades last several days to weeks. Requires less frequent monitoring, suitable for those with limited daily availability.
Long-term Investing: Involves holding positions for months or years. Not ideal for active traders due to fees and leverage constraints.

The typical FTMO Trader holds positions for a few hours to a few days. That means the majority of them utilize intraday or swing strategies. Let’s try and explore two options:

Karl has a regular job and trading is his side job, that he would like to finance his holiday with and gain some skill in the meantime. His regular job is 9 to 5. He decided to wake up at 7:00am and spend 30 to 60 minutes analyzing the markets. As monitoring the situations on significant levels and reacting to them would be too disturbing and he could miss the opportunities, he relies on placing limit orders to ensure trades are executed at desired prices and sets stop-loss and take-profit orders to manage risk.

During the day, Karl relies on notifications from his trading app to monitor price movements. In the evening, he reviews his trades and journals his observations to refine his strategy.

Monica has a busy schedule, so she prefers swing trading while monitoring the 1-day candles. She reviews the markets on Sunday evenings and sets alerts for key support and resistance zones. When the market reaches these zones, she receives a notification.

With plenty of time to make her decisions, Monica reviews the market conditions in her free moments and decides her next steps, whether to enter a trade with a market order or set a limit order for execution at a specific price.

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Writing Down Your Trading Plan

Now let’s begin with creating your actual trading plan. Don’t worry if it isn’t perfect on the first attempt; feel free to refine it until it fits your needs. Remember, you probably won’t have a flawless plan right away. It’s crucial to ensure that the rules and conditions you set are realistic and something you can consistently follow to the letter.

If you need a bit of inspiration, see the example plan below.

Define Your Goals and Objectives
- Describe Your Vision: Describe your vision of the final state if the plan works out well.
- Objective: Outline the one main, most important, measurable goal.
- Financial Goals: Specify your target returns and acceptable risk levels.
- Time Horizon: Determine the validity period of this plan and when it will be reviewed.
- Risk Tolerance: Assess your comfort with potential losses.
Choose Your Market and Instruments
- Considerations: Take into account the ease of risk management, volatility, liquidity, and broker selection.
- Markets: Decide whether to trade stocks, forex, commodities, cryptocurrencies, etc. It is a good idea, and our recommendation, to pick something you have some relation with or familiarity with.
- Instruments: Select specific instruments within those markets that align with your strategy.
The Methodology
- Mechanical vs. Discretionary: Decide whether to use a mechanical trading system with predefined rules, a discretionary approach that relies on your judgment, or a combination of the two.
- Your Trading Strategy
  - There can be more than one trading strategy in your plan.
  - A comprehensive topic on methods of trading strategy development is covered in later lessons of FTMO Academy. For now, note that the methodology of analysis and trade execution is just one part of the entire trading plan.
  - Timeframe: Choose according to your selected trading style. A popular method is using two or more timeframes: the main (higher) timeframe for establishing directional bias and defining key levels, and a second (lower) timeframe for a detailed overview and seeking confirmation.
  - Entry Criteria: Identify conditions for entering trades (timeframe, technical indicators, chart patterns, fundamental analysis).
  - Exit Criteria: Set rules for exiting trades: profit targets and stop-loss levels.
  - Position Sizing: Determine the amount of capital to risk on each trade.
Money Management and Rules for Trading
- Before achieving success in the markets, traders need to learn how to protect their capital first.
- Stop-Loss Orders: Always implement stop-loss orders to limit potential losses.
- Risk-to-reward: Deciding when to take your profit is a crucial part of successful trading. Will you exit the whole position when reaching a fixed risk-to-reward ratio, take partial profits at discretionary levels, or trail a small portion for a big home run? In all cases, your RRR (risk-to-reward ratio) should be aligned with the win rate that you determined from backtesting.
- Risk per Trade: Define the percentage of capital to risk on each trade.
- Daily Goal and Maximum Daily Drawdown: Set daily profit targets and loss limits.
- Maximum Drawdown: Define a maximum loss threshold that triggers a reassessment of your strategy.
Develop a Routine
- Market Analysis: Conduct regular market analysis based on your trading style.
- Trade Journaling: Document all trades, including rationale, entry/exit points, and outcomes.
- Performance Review: Periodically review your trading performance to identify areas for improvement.
Continual Learning and Improvement
- Education: Stay updated with market trends, new strategies, and trading tools.
- Review and Adjust: Regularly refine your strategy based on performance reviews and changing market conditions.
- Optimization: Identify and integrate methods for improving various aspects of trading.
Psychohygiene
- Maintaining mental and emotional well-being is crucial for sustained success in trading. Trading is often extremely immersive, but it is of utmost importance to keep a distance. Omitting these aspects can lead to burnout, poor decision-making, and ultimately hinder your trading performance.
- Regular Exercise: Engage in physical activities of your choice. Exercise helps to reduce stress and improves focus.
  - Start your day with a 30-minute jog or a morning yoga session to clear your mind before you begin trading.
- Breaks and Off-Chart Time: Schedule regular breaks during your trading day to prevent burnout and maintain sharp decision-making skills.
  - Take a 10-minute break every hour to stretch, walk around, or meditate. This can help you reset and avoid fatigue.
- Hobbies and Leisure Activities: Spend time on hobbies and activities you enjoy outside of trading. This provides a healthy distraction and keeps you mentally fresh.
  - Dedicate time in the evening to reading, painting, or playing a musical instrument to unwind and detach from the trading environment.
- Social Interaction: Maintain a healthy social life by spending time with family and friends. Socializing can provide emotional support and reduce stress.
  - Plan weekly meet-ups with friends or family dinners to ensure you have a support system and time to relax.
- Mindfulness or Meditation: Utilize these techniques to improve concentration and emotional regulation.
  - Incorporate a 10-minute meditation session into your daily routine to enhance your focus and reduce anxiety.
- Healthy Sleep Routine: Ensure you get adequate sleep each night to maintain optimal cognitive function and emotional stability.
  - Establish a consistent sleep schedule, aiming for 7-8 hours of sleep per night.
- Diet and Nutrition: Follow a balanced diet to support overall health and energy levels throughout the day.
  - Incorporate nutritious meals and snacks, such as fruits, vegetables, and whole grains, to maintain steady energy and focus.

By incorporating these Psychohygiene practices into your routine, you can maintain a healthy work-life balance, reduce stress, and improve your overall trading performance.

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Example of a Simple Trading Plan

Goal

Achieve a 15% annual return with a maximum drawdown of 10% of initial capital.
Target an average monthly return of +1.25%.
Revise the plan if a 10% drawdown is reached.

Expectations, Constrictions and Weekly Goals

The method below wasn’t backtested and it serves for illustrative purposes. It would likely be better to anticipate a lower win rate while allowing profits to run by trailing the trending market.
However, let’s suppose that our method has a 50% win rate with a fixed RRR of 2:1.
While risking 0.5% of capital on each trade, the monthly plan would be reached with less than 2 good trades. However, with a 50% win rate, there is almost a certainty that you can experience a series of losses, such as 6 losses in a row. Be sure to account for that possibility.
Since our trading strategy doesn’t provide an excessive number of signals, we do not need measures to prevent overtrading. Instead, we trade every situation that fits the defined conditions. There will be good months and bad months, but that is just part of the process.

Market and Instruments

Trade one major forex pair: EUR/USD.

Example Strategy Description

The idea of this strategy is to enter a trending market during a pullback move against its direction on a lower timeframe, while speculating that key market structure levels will hold and the market direction will realign with the stream of the higher timeframe trend.

Entry Criteria:
- On a 1-week timeframe
  - Price action is trending.
  - Waiting for the break of a significant low.

- On a 1-day timeframe
  - Price action is generally following the trend of 1W.
  - Waiting for a price to pull back to a SR zone, enter there and bet on the continuation of the trend.

The position always follows the direction of the 1W trend.

Position Sizing: Risk 0.5% of total capital on each trade.
Entry Setup: Set a limit order in the middle of the predefined support / resistance zone.
Exit Criteria:
- Stop Loss Order: At the previous significant swing high/low on 1D chart
- Take Profit Order: Upon reaching a profit target of 2:1 reward-to-risk ratio.

Routine

Pre-Market Preparation: The trading strategy doesn’t need much attention.
- 1W: Friday evening, Sunday evening, or Monday morning: update the weekly chart by assessing the trend and highlighting significant levels that invalidate it or confirm its continuation.
- 1D: Around the end of market hours each day, assess the trend on the daily chart or perform daily technical analysis during the evening.

Execution: Set a limit order at the defined level if all the conditions align.
Journaling: Record all trades in a spreadsheet, noting reasons for entry and exit, and outcomes. Always keep a screenshot of the situation.

Testing

Backtesting: Test the strategy on the last 5 years of historical data or until having at least 100 situations analyzed.
Paper Trading: Implement the strategy in a demo account for 3 months.

Conclusion

Building a trading plan involves understanding your motivations, defining clear goals, choosing the right market and instruments, developing a robust strategy, and managing risk effectively. Regular analysis, disciplined execution, and continual learning are key to long-term success.

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