Build a Trading Plan

You can understand a chart, know how an order works, and calculate the dollars involved in a trade.

Then price starts moving, and you still face a difficult question.

What, exactly, am I supposed to do now?

A trading plan gives those decisions a structure before the outcome is known.

It describes what you intend to trade, the conditions you require, how you will enter and exit, how you will size the position, and when you will stand aside.

It also gives you something specific to compare with what actually happened.

Writing those rules down does not establish that they will make money. A clearly defined approach can still lose money. Its usefulness depends on both the decisions it describes and the evidence behind them.

For this lesson, we’ll build the structure. The examples explain how to make a plan clear; they are not a recommended trading strategy.

Plan, strategy, and individual trade

Start by separating three things that are often mixed together.

Your trading plan is the broader framework for how you operate.

A strategy is a particular set of rules for identifying and managing possible trades. Your plan might permit one strategy, or several separately defined strategies.

An individual trade is one application of those rules to a particular situation.

Think of a sports team. Its preparation includes who is available, the plays it practices, and the conditions for using them. One play is part of that preparation. Running it once is a single event.

In trading, one winning event does not establish that the whole approach works. And a losing event does not, by itself, establish that the rules were broken.

To review either one fairly, you need to know what was supposed to happen.

Define the setting

Begin with the setting.

Which market and exact instrument are you using? Are you practicing in a simulator, or using a live account? Which trading hours, time zone, and chart settings apply?

For futures, identifying the exact contract matters. So does understanding its value, expiration, and the account rules that apply to it.

Your available time matters too. A plan that requires monitoring an open position needs to account for whether you can actually do that.

Make the setting specific enough that you can recognize when you are operating outside it.

Define qualifying conditions

Next, define the conditions for considering a trade.

“Buy when the market looks strong” leaves a lot open to interpretation.

What does strong mean? A rising price? A completed candle? A move above a level? Over what period?

Suppose an illustrative rule requires a completed five-minute candle to close above a price level marked beforehand.

That is more observable. A candle can move above the level while it is forming, then finish below it. Under this example rule, those two situations lead to different decisions.

You would still need to define how the level is selected, which candles are eligible, and whether a close exactly at the level qualifies.

This example only demonstrates clearer wording. We have not established that buying after that condition offers an advantage.

The purpose is to describe a decision so you can apply it consistently and examine it later.

Define the entry process

Then define the entry process.

A condition appearing on a chart and a position opening in your account are separate events.

Which order would you submit? At what price, if the order requires one? How long would it remain valid? What would cause you to cancel an unfilled order?

Suppose the condition appears, but your limit order does not fill. Price moves away.

Your plan needs to say whether the order remains working, expires, or must be canceled. Replacing it with a different order would be another decision that needs a rule.

As we covered earlier, submitting an order does not mean it filled. Check the order status and the actual position.

Define exits and permitted changes

Now define how the trade ends and how it may change while open.

What condition calls for a protective exit? How is that exit implemented? What would cause an exit after a favorable move, or because the permitted holding period has ended?

A plan may use a price target, a time-based exit, another defined condition, or a combination. Specify which applies and how competing conditions are handled.

Also describe any permitted changes after entry. If you intend to move a protective stop, reduce the position, or add to it, define the conditions and recalculate the resulting exposure.

Leaving those decisions vague makes it difficult to tell a planned adjustment from an improvised reaction.

Remember the execution limits from the previous lessons. A planned stop price does not promise an exact fill or a maximum loss. An exit order that remains unfilled can leave exposure open.

The plan must connect the intended exit with checking what actually executed.

Size and combined exposure

Position size comes next.

Use the contract value, planned adverse distance, and proposed quantity to calculate the planned price loss. Then consider applicable costs, execution uncertainty, and account restrictions.

The result needs to fit the limits defined in your plan. If it does not, the proposed trade does not qualify at that size.

As we saw in Lesson Six, the answer can be zero contracts.

Your broader plan also needs to account for positions held at the same time. Several trades can move against you together. Separate per-trade calculations do not, on their own, describe the account’s combined exposure.

Distinguish your own operating limits from the rules imposed by a broker or trading program. Understand how each relevant limit is measured, what actions it restricts, and what happens when it is reached.

A planned limit is a decision rule. It cannot make uncertain execution behave like a guaranteed cap.

Reasons to stand aside

Now add the reasons to stand aside.

These are part of the plan, too.

The required condition might be absent. The allowed trading window might have ended. The proposed size might not fit. You might be unable to confirm the data, your orders, or your position.

Your plan should also state how scheduled announcements and other known events affect eligibility. An event rule needs a defined source, time zone, and restriction; “avoid the news” leaves those details unresolved.

Include operating problems. What will you do if the connection fails, an order is rejected, or the displayed position is unclear?

Learn the broker’s or platform’s procedures before you need them. During an unresolved problem, blindly submitting replacement orders can create additional exposure.

The appropriate response depends on the actual position, working orders, and available means of checking or managing them.

Stand-aside rules can prevent a new entry. A position already open still needs to be managed.

Records and review

Finally, decide what you will record and how you will review it.

Keep the relevant plan version, the condition you observed, order details, actual fills, quantity, exits, costs, and any departures from the rules. A screenshot can add context, but it does not replace the execution record.

Review two questions separately.

Did I carry out the plan as written?

And what do the results tell me about the approach?

A trade can follow the rules and lose. A trade can break the rules and win. The outcome matters, but it cannot answer both questions by itself.

If you label every winner a good decision and every loser a mistake, you lose the ability to examine the process honestly.

Keep versions visible

Keep rule changes visible as well.

If you revise a condition, record what changed, why it changed, and when the new version began. Keep the earlier results attached to the rules that actually produced them.

Otherwise, a revised description can make past decisions appear more consistent than they were.

Before relying on a new approach, practice applying the written rules and investigate its results. Simulation can help reveal unclear instructions and operating mistakes. Simulated results have limitations and do not establish what live trading will produce.

We’ll examine testing and evidence more fully in later lessons.

A clarity check

For now, try a simple clarity check.

Can you identify the market and setting?

Can you tell when a trade qualifies, and when it does not?

Can you describe the entry, exit, and permitted adjustments?

Can you calculate the exposure and check it against the relevant limits?

And can you explain what you will record afterward?

If an answer depends on deciding later what you meant, that part of the plan needs more definition.

You do not need a complicated document to begin organizing these questions. You need rules clear enough to apply, records accurate enough to review, and a willingness to investigate whether the approach deserves your confidence.

In the next lesson, we’ll look more closely at trading strategies and an important word people often use: edge.

What would give a strategy an advantage, and what evidence would support that claim?