How To Build A Trading Plan That Works: Step-By-Step

   

What is a trading plan? A trading plan is basically written instructions for what you need to do every single day. If you’re reading this article right now, you already know that you need to have a trading plan.


In this article, I will show you the different elements of a trading plan, and I’ll also give you a template that you can use, which will only take you 20 or 30 minutes to fill out.

Step Number One: The Foundation

There are actually two parts to the trading plan.

Step number one is the foundation. This is is what goes into your trading plan before you actually start trading, and it’s a few questions.


If you would like to have a copy of this trading plan, you can get a copy HERE.

How To Build A Trading Plan

First of all, fill in your name. Then you want to write in when it was last updated. You will see this trading plan is a living document. Then for step number one, you should define your goals.


How much money do you want to make with trading per year? You already know my goals. I want to make $180,000 per year with trading, and that is $15,000 per month. For you, your goals might be different, so type them in there.

How To Build A Trading Plan

The next thing that I recommend you have for your trading plan is a credo. The one I wrote for myself is already in the template, and you can change it to anything you want. It’s something that you should recite every morning before you start trading. It will help you to be mentally prepared.


Mine reads, “I alone am responsible for my trading decisions and I’m 100 percent responsible for my results. I will follow my plan, and I will trade what I see not what I think. If I do not have the capital I can afford to lose, I will not trade.


Again, that is mine, but whatever your credo is, it makes sense to recite it to yourself every morning.

How To Build A Trading Plan

Now there are several preferences that you should write down in your trading plan. The first is your risk level. How much of your account are you willing to lose? When do you pull the plug?


When trading there is risk involved, so you should define how much are you willing to risk. Are you willing to risk 20 percent, 30 percent, or even 50 percent of your account? When do you stop trading and go back to the drawing board and decide your strategy didn’t work?


I recommend that you do not risk more than two percent of your account on any given trade. But what happens if you have five losing trades in a row? What about 6 or 10 losing trades in a row? This is why it’s important to know exactly where you pull the plug.

How To Build A Trading Plan

The next is your time horizon. How long are you planning to be in these trades? Do you like to day-trade where you are out of the trades at the end of the day, or swing trade?


I like to be in trades between 5 and 20 days. I don’t like to be in trades for the next few months or years, and I will explain why this is important in a moment.


Think about the other extreme. Warren Buffett likes to be in trades for years, even decades.

How To Build A Trading Plan

Next, you have to figure out what your availability is. What are your possible trading hours? If you want to day trade, but you’re only available at night, this won’t work.

You need to be available throughout the day to day-trade. Are you only available before the markets open, or after the market’s open? These kinds of details are important.

How active do you want to be? Ask yourself if you want to sit in front of the computer all day long. Do you only want to trade for one hour per day, or do you only want to spend one hour per weekend?

How much time do you actually have? We all have busy lives, but you have to make this a priority if you want to actually make money with trading.


Based on your preferences, this is when you select a trading strategy. You might want to day trade, but if you only have time on the weekends to look at the markets, then it does not make sense.
For me, the trading strategies that I like to trade are the PowerX Strategy and The Wheel Strategy.


If you would like to learn more about the strategies I have books about The Wheel Strategy, and The PowerX Strategy. I also have videos explaining these strategies, that I will link at the end of this article.

Rockwell Trading Plan

Back to the trading template. You’ll write down what strategies you want to trade, as well as what markets you want to trade. Do you want to trade crypto, forex, stocks, or options?

When trading, you have so many possibilities. The idea here is to limit your choices so that you’re not overwhelmed and have clarity.


After you have decided what you want to trade, you need to decide how much capital you have available for trading. There’s a formula you can use to figure out how much money you should have in your account.

How To Build A Trading Plan

This formula is the amount that you want to make per year, divided by the expected return of the strategy. If you want to make $100,000 per year, and you’re expecting to make 30 percent per year, you need $335,000 in buying power.


If you have a cash account, then this is the equal amount of your cash in your account. Do you have a margin account? This means that only 50 percent of that needs to be cash. I’m just using a rough number here, but this would be $170,000 in cash.

How To Build A Trading Plan

If I want to make $180,000 per year, we would divide this by 0.3, this is what I’m expecting. This means that I should have around $600,000 in my account.


I like to use a margin account and I put only $250,000 in cash in this account. This is because I know that I usually make more than 30 percent per year. With this formula, you know what goal you need to shoot for.

Position Size

Now we need to figure out the position size. You know how much buying power you have in your account is, but how many positions will you have open at any given time? For me, this is between five and six.


If you have a smaller account, I recommend that you trade fewer positions, maybe three to four. If you have a larger account, you can diversify more. This is a personal preference and it’s up to you.

How much do you want to be diversified? Several of our Mastermind students like to trade around six to 10 positions at any given time, and that is fine.


How big is each position? Are you dividing them or do you have some other algorithm? For me, I like to divide them. This means I will divide $100,000 per position.

Will you reserve any money for rescue missions? If so, how much? You want to write all this down before you start trading. That’s what is important.

How To Build A Trading Plan

The last thing that we have here in the preparation of the foundation is a skill assessment. Do you have all the skills that you need? Are you familiar with your trading strategy, whatever it might be, inside out? Do you all know all the nuances?


If you are using margin, do you know how to use it, and use it responsibly? Do you know the tools that you’re using inside out? Do you know how to trade stocks, options, or crypto?

Are you familiar with placing orders, entry orders, stop losses, and profit targets? Do you know the difference between OCO orders, day orders, and GTC orders?


If not, then educate yourself. I have videos on my Youtube channel covering all these topics. Do you know about risk management? Do you know how to apply it? The same with money management.

If you’re not checking all these boxes, you know what to do over the next few days. And that is OK, watch a few more videos to educate yourself so that you can check all the boxes.


Finally, choose a tool to help you in your trading. Every trader needs to have three pillars, and the three pillars of successful traders are:

  • One, you need to have a trading strategy.
  • Two, you need to have professional tools.
  • Three, you need to have the right mindset.

What tools are you using? Are you using the PowerX Optimizer? Are using TradingView? Any other tools? Learn the tools that you’re using inside out, whatever that may be.

Step Number Two: Establish A Trading Routine

Now we can go to your trading routine. Your trading routine consists of three things that you need to do pretty much every single day.

  • One, find the right stock, option, or cryptocurrency to trade.
  • Two, know when to enter.
  • Three, know when to exit.

When it comes to exiting, we’re talking about a stop loss, profit target, and possibly a time exit.

Trading Routine

Do you have rules on how to find the right stock for the option? For the PowerX Strategy, we look at the P&L chart.

PowerX Strategy

The P&L chart is located below the stock chart. We want to see a nice P&L chart. Also, we are looking at gappiness, trendability, and what I refer to as the five dollar rule. The five-dollar rule means I don’t trade stocks that are below $5.


If you are trading The Wheel, you have to find the right stocks. What Wheel stocks are you considering? Value stocks? And so how do you define value stocks? I made a video about how to tell the difference between value and growth stocks, you can check it out HERE.


For me, I don’t like to trade Chinese stocks. I don’t like to trade leveraged ETFs, and I don’t like to trade meme stocks when I am trading The Wheel. these are hard rules for me that make it easy when I’m finding stocks to trade with The Wheel Strategy.


When you have a plan, trading becomes EASIER. It’s not EASY, but it becomes less overwhelming.
When it comes to the options for The Wheel, the question is what strike prices do you consider?

AMC

For me, it needs to be below, or at, the lowest low indicator. We can use AMC as an example even though it’s not a stock I would trade, but this is where we look at the lowest strike.

We want to make sure that the lowest strike is at, or in this case, it is slightly above, the lowest close indicator.

CAR

The same for CAR. See, this is where it is below.

PENN

And PENN, not that I would trade these stocks, I’m just using these as an example. In this case, it is above the lowest close indicator, so I would not consider this.

The Wheel Options

Have your rules. What expiration dates are you trading? For me, on Mondays and Tuesdays, I’m looking for this week’s expiration. Then on Wednesdays, Thursdays, and Friday, I’m looking for this week’s and next week’s expiration.


Then you define your entries. When exactly do you enter a stock or an option? Now these rules are defined according to the strategies here, but you still want to write them down.


Same with the exits. Define your exits, a stop loss, a profit target, as well as a time exit here. And a time exit for me is a black bar. So on a black bar, I’m exiting.


Now, money management is another important factor. When do you increase or decrease your position size? If you’re starting with a $100,000 account, and after a while, you have traded it up to $120,000.

How are you changing your positions? Are using fixed ratio money management? Are using just a fixed fractional money management?

There are different money management types, and if you’re not familiar with this, you can check out a video I did covering this topic HERE.

Summary

This is what you should have in a trading plan. As you can see, it’s very easy. When it comes to this trading plan, borrow, don’t copy. Don’t use my trading plan. My trading plan is my trading plan.

Your trading plan is your trading plan. It does make sense to borrow a trading plan from a successful trader, which is why I’m sharing it, but make it your own.


Also, be very specific. Keep in mind your plan is a work in progress. This is why I said you should document when it was last updated.

I also recommend that you review your plan monthly, quarterly, and yearly. Figure out what works, what doesn’t work, and adjust your plan. This is a living document here.


Finally, three frequently asked questions.


Can I change my trading plan at any time? Yes, you can. But, you should not change it daily or weekly. Make sure that you test the change that you want to make.


How can I make sure that this works? Paper trade your trading plan with a simulator for at least 40 trades. This is what I recommend. This way, you know whether this trading plan is a solid trading plan that works or not.


Finally, what is the difference between a trading strategy and a trading plan? A trading strategy answers the following three questions. One, what stock or options should I trade? Two, when do you enter? Three, when do you exit? As you can see, a trading plan is more comprehensive, especially the stuff in the beginning.


If you would like your own copy of this trading plan, you can get one HERE.

If you would like to learn more about the two strategies that I trade, I suggest picking up a copy of my books. You can grab a copy of The PowerX Strategy HERE, and a copy of The Wheel Strategy HERE.

I also have two videos for you. One of them is explaining the “PowerX Strategy.“ The other one is explaining “The Wheel Strategy” in detail.

Read Next: How To Find Value Stocks vs. Growth Stocks: IMPORTANT For The Wheel



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