What do you think defines a successful trading plan? I'd venture to guess that it consists of several key elements. Some may include: properly diversifying your portfolio across asset classes, executing on trade ideas with discipline and confidence, clearly defining entry points and targets, being aware of the range of potential outcomes for any given investment.

Trading success is measured in many different ways. The fact remains that if you are buying low and selling high over an extended period of time, your financial future will be bright (provided you keep emotions out of the equation). If you can adopt even a few of these 5 tips into your daily routine, it will greatly improve your chances of long-term success. 

Remember, there is no "one size fits all" trading or investment plan. You need to find what works for you and be honest with yourself as you go through the 5 steps outlined below.

Assessing Your Strengths and Weaknesses

This is one area that many novice traders avoid or ignore because it requires a great deal of self-reflection. To properly assess your skills, you need to start by making a list of the following: what do you know? what don't you know? and finally, what are your realistic goals for the future of your trading.

When it comes to education and experience, you should have a more comprehensive list of strengths and weaknesses than you would for the average trader. If you are an active participant in online forums or chat rooms devoted to sharing information about financial markets, then that puts you a few steps ahead of most traders. Another way to get yourself ahead would be to look into funder trading accounts, which offer a simulated trading experience that allows you to get comfortable executing trades and developing your skills without putting your own capital at risk.

Use this information to your benefit and see how it can help you build a better, more robust trading plan. This will be an ongoing process so please do not expect to go to step 1 and be finished with all of this in one day.

Gathering Business Requirements

This part is tricky because it requires you to think about the goals and objectives that you want to accomplish over the next 3 months, 6 months, or 1 year. Keep in mind that these are not your trading goals per se, but rather they are for business purposes.

Answering questions like "What does my desk look like?", "Where do I see myself being 12 months from now?" will truly help you determine what it is you need to do as a trader. The answers can be very generalized or extremely specific; it does not matter as long as the goals are realistic and achievable.

Designing Flowcharts and Diagrams

The first step is to list out all of your trading activities (both buy and sell signals) and then determine where they begin and where they end. It might sound simple, but take a few minutes to do this and you will be surprised at how quickly things can get messy. Once you have the list of activities, it is time to design your trading workflow.

Flowcharts will help you visualize all of your trading activities (both buy and sell signals) and where they begin and end. Once you have your workflow completed, it is time to determine when you will perform each task. Diagrams are a great way of showing when specific activities from the trading plan will take place during the trading day (i.e., the market open and market close).

Determine Your Risk Tolerance

This can be one of the most challenging questions to answer, especially if you are new to trading or investing. The key is to determine how much risk is appropriate for your personal situation and that will not change significantly over time.

If you are just starting out as a trader, ask yourself these two questions: "How much money do I have saved for trading?" and "How much risk am I willing to take in order to potentially make that money back (and then some)?". If your trading account is small and you do not want to take too much risk, then stick with low-risk / low-reward trading strategies. On the other hand, if you have a sizable amount of capital to trade with, then you should probably be looking at higher-risk / higher-reward trading strategies.

Specifying Entry Requirements

This is where things start to get interesting because this is where the rubber meets the road. Are you willing to take a one-day loss of 5% or more to earn much larger gains? If you answered "yes", then you need to be very clear about how much of a loss is too much for your trading account.

The reality is that there are no guarantees in trading which means that if you want to earn larger gains, then you will have periods where your trades lose money. If the one-day loss limit has not been clearly defined within the trading plan, then you will find yourself exiting winning trades simply because of a loss on another position. What good does that do?

Final Thoughts

Are you still wondering what’s a trading plan? We recommend you read the linked article. A trading plan can be extremely valuable to your trading business. It does not have to be complicated but it should include 5 basic components: 1) Trading goals, 2) Business requirements, 3) Workflow diagram(s), 4) Risk tolerance, and 5) Entry/exit criteria.

Once you have the five components listed above in place, you can then begin to craft your trading strategy and determine when you will enter and exit the trade. If you find yourself lacking in any of the five components, take the time to develop your plan before entering a position because it can be extremely difficult to make changes after you have market exposure.