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Every successful journey starts with planning; trading is no different. A trading plan for a trader is like a business plan for a business owner. It is what stands as the deciding factor between success and failure. In case you are just getting started then it makes sense to first understand what the term exactly means.

Basically, a trading plan can be defined as a set of rules which one needs to follow in order to increase his/her chances of winning. Irrespective of whether you are a short-term trader, long-term trader or someone in between, you need a fool-proof trading plan to become successful in this profession.

When talking about trading plan, most traders mistake the term for a trading system. So, let’s take a moment to clear that up.

Trading Plan Vs. Trading system – What’s the actual difference

A trading system basically refers to the visual combination of charts, indicators and tools that you use in order to analyze and predict the markets. The key purpose of having a trading system is to identify proper entry and exit signals. There is absolutely no emotion involved in a trading system.

On the other hand, a trading plan refers to a set of rules which a trader follows to improve his/her trading success. A trading system doesn’t care about the emotion of market participants whereas a trading plan includes everything from technical set up to emotions and more.

Who should use a trading plan/system? The following table highlights the different types of traders who need a trading plan:

Trading Method

• Swing or Positional
• Intraday
• Algo trading
• News based trading

Trading Type

• short term
• shorter
• even shorter
• shortest

Timeframe

• H4, daily, weekly
• hours, minutes
• minutes
• seconds to minutes

A trading plan is an essential toolkit for traders; however it varies from trader to trader depending on their method – whether they choose intraday, swing or long term.

10 Benefits of Using a Trading Plan

The advantages of a smart trading plan can be summarized as follows.

• Trading with a plan is always better than trading with none
• It usually leads to more clarity and little confusion
• Helps minimize uncertainties in trade execution
• Helps to monitor results well so you can learn and improve over time
• A person who sticks to his trading plan rarely falls into the trap of negative emotions such as fear, greed and compulsive trading
• Nobody can control the market but a trader with a proper plan can control his/her trading behaviour which results in fewer bad trades
• Someone who sticks to his/her trading plan for a long period of time evolves as a disciplined trader which is very important for success
• Even if a bad trade is executed in a hurry or by mistake, your trading plan will help you come out early with less damage
• A trading plan helps you gain a better understanding of risk assessment and money management
• Keeps you motivated and hungry

Closing Thoughts

The ultimate goal of having a trading plan is to improve everything related to your buying and selling activity so you can find the shortest route to success. Remember, the goal of a good trader is to make the best trades, money is secondary.