Developing a Written Trading Plan
This lesson explains the purpose of a written trading plan, its required contents, the case for brevity, the amendment procedure, and its validation on a demo account.
Risk note: educational content only. This article is not financial advice, investment advice, or a recommendation to buy or sell any instrument. Trading leveraged products can result in losses greater than expected, and each reader should understand the risks before trading.
A trading plan is the written record of decisions made in advance, under conditions of calm, so that they need not be made during a trading session under pressure. The necessity of such a document is widely acknowledged, yet few retail traders maintain one that is consulted. The usual reason is that the plans presented as models are lengthy, and a lengthy document is written once and not read again. A functional plan is short enough to be reviewed before every session and specific enough that its rules can be checked against each trade. This lesson sets out its contents, maintenance and validation.
The purpose of a written plan
During a trading session, the trader is exposed to the influence of open profits and losses, recent results and the movement of price on the screen. Decisions made under these conditions are systematically worse than decisions made in their absence. A written plan removes the most consequential decisions from the session entirely: which instruments will be traded, which conditions justify a position, how much will be risked, and when trading will stop. The session then consists of executing decisions already made rather than making new ones.
The plan also provides the standard against which each trade is assessed. Without a written rule, it is not possible to determine whether a trade was taken in accordance with the method or in departure from it, and therefore not possible to distinguish a method that is failing from a trader who is failing to apply it. The trade journal, addressed in the following lesson, records adherence to the plan, and the two documents function together.
Required contents
A complete plan specifies the markets that will be traded and the hours during which they will be traded. It describes each setup that qualifies for a position with sufficient precision that another trader could identify the same setup on a chart; a setup described in terms of impression or feeling is not a rule. It states the risk per trade as a percentage of equity, the daily loss limit at which the session ends, and the maximum number of positions that may be open simultaneously.
The plan further specifies how a position is entered, where the stop-loss is placed and how the exit is managed, in the terms set out in the preceding lessons. It states the procedure to be followed after three consecutive losses, which typically involves a reduction in size or a pause. It also states the procedure following an unusually large gain, since a large win produces its own distortion of judgement, commonly an increase in size or a relaxation of selection criteria on the following trades.
- Instruments traded and the trading hours observed for each.
- Qualifying setups, described in objective and verifiable terms.
- Risk per trade as a percentage of equity, daily loss limit and maximum concurrent positions.
- Entry procedure, stop-loss placement and exit management rules.
- Conditions that end the session, including consecutive losses and the daily loss limit.
Length and accessibility
A plan that occupies one page is read; a plan that occupies twenty pages is written once and not consulted. The document should be confined to the rules that the trader will check before and during a session. Background material, the rationale for each rule and the results of testing belong in a separate record and not in the operational document.
The plan should be printed and kept in view at the location where trading takes place. Consulting a physical document requires the trader to look away from the chart, and this small interruption is a material safeguard against impulsive departure from the rules. A plan that exists only in memory is subject to revision by memory, which under the influence of an open position is not reliable.
Amendment procedure
The plan is amended on a fixed schedule, on the basis of evidence drawn from the trade journal, and not during a session. A change made while a position is open or immediately after a loss is not an improvement to the method; it is a rationalisation of a departure from it. The plan should therefore include a rule about its own amendment: for example, that changes are considered only at a monthly review and take effect from the following month.
At each review the journal is examined for rules that have been repeatedly broken. Where this occurs, one of two conclusions follows: either the rule is inappropriate to the trader's circumstances and should be revised, or the rule is sound and the trader's application of it requires attention. The review should establish which of these applies before any change is made. A plan that changes frequently provides no stable basis for evaluating results.
Validation on a demo account
A newly written or substantially amended plan should be applied on a demo account before capital is committed. Onys Kapital provides a demo account with USD 10,000 in virtual funds on the live MetaTrader 5 platform, with the same instruments, pricing and execution as a funded account. The purpose of the demo period is not to demonstrate that the method is profitable, which cannot be established over a small sample, but to confirm that the plan is complete, that its rules can be applied without ambiguity, and that the trader is able to follow it.
The trading hours page and the economic calendar on the Onys Kapital website are relevant to the sections of the plan that specify when trading takes place and when it is suspended around scheduled releases. Both should be consulted while the plan is drafted so that its rules are consistent with the actual conditions of the instruments selected.