A trading plan — your rules, written down in advance. The point is to make the decision before the price starts moving on your screen, and your emotions along with it.

A plan doesn’t make trades profitable. It makes them consistent: you follow the same sequence every time, so later you can work out exactly what worked and what didn’t. Without a plan, every trade is different from the last, and there’s nothing to learn from.

What goes into a plan

  1. Entry conditions. The signs that make you consider a trade.
  2. Reasons to stay out. The signs that keep you out, even if everything else lines up.
  3. Stop loss. Exactly where it goes and why it goes there.
  4. Target. The level you plan to hold the position to.
  5. Position size. Calculated from your acceptable risk, not picked by eye.
  6. Trading hours. When you trade and when you definitely don’t.
  7. Recording the result. What you write down after the trade closes.

Reasons to stay out — the most important item and the one most often skipped. Without it, a plan turns into a list of reasons to get into a trade.

Risk-to-reward ratio

Before opening a trade, compare two distances: to the stop loss and to the target.

Example. Entry 100, stop 98, target 106. The risk is 2 and the potential is 6, a ratio of 1 to 3: for every unit of risk, there are three units of potential profit.

This ratio shows whether the trade makes sense at all. If the risk is 2 and the target is only 1 away, the trade requires you to be right far more often than you’re wrong.

Pre-trade checklist

Go through the items before you open a position. Any “no” is a reason not to enter.

  • I understand what state the market is in: trending or ranging.
  • I know the exact entry price.
  • I know where the stop loss is and why it’s there.
  • I know the target and have compared it with the risk.
  • I’ve calculated the volume from my acceptable risk.
  • The risk in money doesn’t exceed my per-trade limit.
  • I haven’t exceeded my daily loss limit.
  • I’m entering based on my rules, not because the price is “already moving.”
  • I’m ready to accept a loss on this trade if the stop is hit.

When not to enter

  • The entry conditions matched “almost,” not fully.
  • The calculated volume exceeds your risk limit.
  • The price has already moved away from the planned entry point.
  • You don’t know where to place the stop.
  • You’ve just closed a losing trade and want to win back what you lost.
  • You’re in a hurry and haven’t had time to go through the checklist.
  • You feel unwell or are very tired.

How to build your plan

Start with a short version — one page. A plan you can’t keep in your head doesn’t get followed.

  1. Write down your entry conditions: two or three specific signs, nothing like “when it becomes clear.”
  2. Write down your reasons not to enter.
  3. Set your per-trade risk limit as a percentage and convert it into money.
  4. Set your daily loss limit and the number of trades per day.
  5. Write down a stopping rule: what you do when the limit is reached.
  6. Test the plan on a demo account before using it with real money.

A plan can be changed — but not during trading and not after a single bad trade. Make changes with a clear head, based on a series of trades recorded in your journal.

Check yourself

Put the steps in order

Put the steps for preparing a trade in order

    Work through the situation

    All the entry conditions match, but the calculated volume gives a risk of 3.5% while your limit is 2%.

    Should you enter the trade?

    In short

    • A plan is a set of decisions made in advance.
    • It must include reasons to pass on a trade.
    • Risk and target are compared before opening a position.
    • The checklist is done before entry, not after.
    • Passing on a trade is as much a result of your work as entering one.