The first practical consideration in developing a trading plan is to determine how much time one can afford to spend on trading markets. Do you have time to sit in front of a computer all day long, or just an hour or two? Should you work with someone else?
The Trading Plan Approach
Another question is, do I have the time to develop and test my system, or should I buy one? My personal problem with out of the box systems is that they don’t always tell you how they work. That doesn’t appeal to me because if I don’t know the mechanics of it, I have a problem building confidence in it. Still, for other traders it doesn’t bother them. They don’t need to know as long as they believe it works.
Also, be aware that trading systems tend to degrade over time. That is because if something works, it doesn’t take too long for others to figure it out. Especially with ever evolving computer technology. In my 40+ years of trading I have had to significantly alter my system 4 or 5 times.
That said, it is imperative to have effective tools that you can believe in. Consequently, if you decide to develop your own system you need to back-test to see what works. Also, you must determine if you want to be more focused on the long-term trend, or take a more short-term approach. That also becomes a consequence of the amount of time you can dedicate. Include that with an understanding of your mental threshold for taking losses. These are difficult but important things to consider in developing a trading plan.
Once a type of strategy is determined, the next step is to decide what entry and exit studies should be tested. If one chooses on a trend following approach, one would want to consider entry indicators such as moving averages, average directional index, trend channel index, etc. For a counter trend method one would look at indicators such as stochastic, swing projections, MACD, support and resistance to name a few. Exit and money management strategies tend to be similar for both approaches with numerous stop loss and profit objective techniques available.
Make a Trade Plan
Common sense also goes a long way to make you a successful trader. Yet, a well developed trading plan will give you an “Edge” in the market. It builds confidence. If you have a tool that works, you’ll never second guess about using it.