🎯 In 30 seconds: A trading plan is a short written document that answers, in advance, every decision you would otherwise make in the heat of the moment: what you trade, when you trade, how you enter, where you exit, how much you risk, and when you stop. It turns trading from a string of guesses into a process you can measure and improve. One or two pages is enough. The template at the end of this chapter is ready to copy.
Why write it down
Without a written plan, every trade is a fresh decision made under pressure. That is exactly when the habits in Trading psychology take over: moving stops, chasing, revenge trading.
A written plan also makes improvement possible. If you trade the same way each time, your journal tells you whether that way works. If you trade differently each time, your results tell you nothing.
Investor.gov's article on day trading risks says that before you start you should think about your objectives and experience, your time horizon, your current financial situation and your aversion to losses. A plan is where you write those answers down.
Part 1: goals and money
Goals. Use process goals, not money goals. "Follow my entry and stop rules on 95% of trades" is something you control. "Make $500 a month" is not, and chasing it pushes you to oversize.
A reasonable first-year goal for most beginners: learn, keep losses small, build a journal of 100 or more trades, and find out whether you have an edge.
Money. Trade only money you can afford to lose without changing your life. That means after an emergency fund is in place (see the emergency fund tool), not with money for rent, tuition or debt payments, and never with borrowed money while you are learning. Many people keep most of their savings in a long-term index fund and trade a small slice; A plan for a young person explains that setup.
Part 2: what, when and how you trade
- Markets and instruments. For example, "US-listed stocks and broad ETFs only. No options, no margin, no shorting in year one."
- Filters. Rules that keep you out of bad conditions: minimum share price, minimum average daily volume, no trades in the days before an earnings report. Thin, cheap stocks tend to have wide spreads and big gaps, and they are where many pump-and-dump schemes happen.
- Time frame and schedule. Day, swing or position trading (see Investing vs trading). Also when you will look at markets. If you have school or a job, a swing plan reviewed once each evening is more realistic than watching screens all day.
- Setups. One to three specific, written patterns you will trade, each with a checklist. "Stock above its rising 50-day moving average, pulls back to it, then closes back above the prior day's high." If you cannot describe a setup so another person could spot it, it is not a setup yet.
Part 3: entries, exits and sizing
Entry rule: exactly what triggers the order and what order type you use. For example, "buy stop 5 cents above the setup day's high, valid next day only."
Stop rule: where the initial stop goes, such as "below the setup day's low or 2 x ATR, whichever is closer to a real support level", and the rule that it only ever moves in the trade's favor. See Stop losses.
Exit rules for winners: a target (for example 2R), a trailing stop, a time stop, or a combination. Decide which before entry.
Sizing: shares = (account x risk%) / (entry - stop), rounded down, with a maximum position size. See Position sizing.
Part 4: risk limits
Risk limits are your circuit breakers. They stop a bad day from becoming a bad month. Here is a common structure, using a hypothetical $10,000 account:
| Limit | Example | On a $10,000 account | What happens when hit |
|---|---|---|---|
| Per trade | 1% of account | $100 | Size every trade so a stop-out costs this |
| Open risk (heat) | 5% of account | $500 | No new trades until risk comes down |
| Per day | 3% of account, or 3 losses in a row | $300 | Close the platform for the day |
| Per week | 6% of account | $600 | No new trades until the weekly review |
| Per month | 10% from the month's start | $1,000 | Pause, cut size in half, full review |
| Total drawdown | 20% from the account's high | $2,000 | Stop live trading; go back to paper trading and rework the plan |
These are example numbers, not rules handed down from anywhere. Pick numbers that fit your risk tolerance, then keep them fixed until a scheduled review.
Why the drawdown limit matters: at 1% risk per trade, it takes a long losing run to fall 20%. If you get there, something is wrong with the method, the market has changed, or the rules are not being followed. Drawdowns and losing streaks shows how large normal drawdowns are.
Part 5: daily routine and review
Before the session: check the market (for example the market dashboard), any scheduled news on the earnings calendar and in news and economy, open positions and their stops, and whether you are under all your risk limits.
During: only trade setups on the list. Size each one from the formula. Enter the stop order right after the fill.
After: record every trade in your trading journal: date, setup, entry, stop, exit, result in dollars and R, whether you followed the plan, and your mood.
Weekly review (30 minutes): count plan violations, look at each loss bigger than 1R, check open risk.
Monthly review: compute win rate, average win and loss in R, and expectancy (see Risk/reward and expectancy). Compare each setup separately.
Quarterly: decide what to change, if anything. Change one thing at a time so you can tell what helped.
Also plan for taxes and record keeping. In the US, gains on stocks held one year or less are short-term and taxed as ordinary income, per the IRS. Keep your broker statements and see Taxes for traders.
The fill-in template
Copy this into a document and fill in every line. The right column shows a hypothetical example for a part-time swing trader.
| Section | Your answer | Example |
|---|---|---|
| Goal for the next 6 months | 100 recorded trades, 95% plan adherence, no month worse than -6% | |
| Account size and source | $10,000 from savings, emergency fund already set aside | |
| Markets | US stocks and ETFs, price above $10, average volume above 1 million shares | |
| Not allowed | Margin, options, shorting, penny stocks, holding through earnings | |
| Time frame | Swing trades, 3 to 15 trading days | |
| Schedule | Scan and place orders 7 p.m. to 8 p.m. on weeknights | |
| Setup 1 | Pullback to rising 50-day average in an uptrend | |
| Setup 2 | Breakout above a 3-month range on volume at least 1.5x average | |
| Entry rule | Buy stop above the setup day's high, valid one day | |
| Initial stop | Below the setup day's low or the range, whichever is lower | |
| Exits | Half at 2R, rest on a trailing stop at 2 x ATR; time stop 15 days | |
| Risk per trade | 1% ($100) | |
| Max position size | 25% of account | |
| Max open risk | 5%, and no more than 2% in one sector | |
| Daily / weekly / monthly stop | 3% / 6% / 10% | |
| Drawdown stop | 20% from high: back to paper trading | |
| Journal fields | Date, setup, entry, stop, exit, $ and R, followed plan?, mood | |
| Review schedule | Sunday weekly review; first weekend of the month for stats | |
| How rules change | Only at the quarterly review, one change at a time, written here with the date |
Try it
Fill in the template for yourself today, even if you have never placed a trade. Then run it for four weeks in the paper portfolio, with real stop orders and a journal entry for each trade. If one of your setups can be written as clear rules, test it on past data with the backtester. At the end of four weeks, count how many trades followed the plan exactly. That number, not the profit, is your first score.
- Why does the chapter prefer process goals to money goals? Answer: You control a process goal, such as "follow my entry and stop rules on 95% of trades". You do not control "make $500 a month", and chasing it pushes you to oversize.
- In the example risk limits for a $10,000 account, what is the daily limit and what happens when you hit it? Answer: 3% of the account ($300) or 3 losses in a row. You close the platform for the day.
- Your $10,000 account falls 20% from its high. What does the example plan say to do? Answer: Stop live trading, go back to paper trading and rework the plan.
- In the middle of a trade you think, "this setup is different, I’ll widen the stop." What does the chapter say? Answer: Do not change the plan mid-trade or mid-day. Make changes only at a scheduled review, in writing.