How to Create a Strategic Trading Plan in 5 Steps
Whether you’re planning a vacation, training for a marathon, or preparing for your fantasy football league draft, it’s always good to create a plan to help achieve your goals.
For investors, creating a trading plan can be an essential first step to start your stock trading journey. It can also help you make trading decisions for your portfolio, navigate the market’s ups and downs, and pivot when necessary.
You know the old saying, "If you don’t know where you are going, you’ll end up someplace else.”
Read on to learn more about trading plans, what they include, and how to create your own.
What is a trading plan?
Trading experiences will vary across investors — from conducting pre-trade analyses, selecting time horizons, choosing risk parameters, and more.
The trading process can be very personal; so it’s understandable that many traders end up making emotional trading decisions from time to time. Still, those missteps can end up hindering progress toward long-term investment goals.
To help guide quick decisions and keep their goals as a North Star, many traders create a trading plan.
A trading plan is a dynamic written document that guides stock traders in discovering and executing trades. These plans need to be re-evaluated and updated as market conditions, goals, and trading skills change.
Trading plans aren’t one-size-fits-all. So, when developing a trading plan, you should identify your goals and trading styles; copying someone else’s plan won’t reflect your unique needs or personality.
In addition, the plan should include a trading strategy, as well as trading management parameters.
Here are five steps to help you create your own trading plan.
Step one: Define key factors for your trading profile
Building a trading plan may feel intimidating, but identifying key factors can be a good place to start. These are some initial building blocks to help guide your plan.
Your trading plan should include four key factors:
Investment philosophy and style
Risk tolerance level
Time horizon
Tax considerations
Investment philosophy and style
Your investment philosophy and style represent your principles and beliefs that guide your decision-making process. An investment philosophy can also determine whether you’re interested in growth investing, value investing, or interest investing.
When you’re deciding your investment philosophy and style, ask yourself:
What are your financial goals?
What is your trading experience level?
How much time can you realistically dedicate to researching, monitoring, and managing your trades?
Risk tolerance
Identifying your risk tolerance can also help determine your financial objectives. Risk tolerance is an assessment of how comfortable you are with the idea of losing money, as well as your financial ability to accept losses.
When you’re deciding on risk tolerance, ask yourself:
How much money are you willing to initially spend for a trade?
Are you comfortable with short-term losses?
Do you have money set aside in savings to compensate for losses?
How often will you track your investments?
Time horizon
Answering how long you plan to hold onto your investment — whether it’s short-term or long-term — can help you determine your time horizon. Typically, the longer you hold onto your securities, the greater the potential to either grow your money or recover after a potential market decline.
When you’re deciding on risk tolerance and time horizon, ask yourself:
When do you plan to exit your trades?
Are your investments intended to help you save for something in the near term or are you focused on long-term wealth building?
How active will you be in monitoring your trades?
Tax considerations
A final component for your trading plan is tax considerations. Time matters when it comes to taxes. For long-term capital gains (or losses), including investments held longer than 12 months, the top federal tax rate is 20% vs. a top rate of 37% for investments held under 12 months before selling.
Dividends can also be taxed if your investments are held in a taxable account. To plan for this, it may be a good idea to set money aside for taxes (a general rule is 30% of your income) and learn about different tax strategies.
Note: Moomoo does not provide tax advice, and any tax-related information provided is general in nature and should not be considered tax advice. Consult a tax professional regarding your specific tax situation.
Step two: Determine the investment products you want to trade
After defining your key profile factors, determine what products you plan to trade to help you towards achieving your investment goals. The ones that you choose to trade should also tie into your key factors, risk profile, and time horizon.
For example, here’s some potential paths forward based on time horizon or risk tolerance:
If you’re focused on long-term investing, you may want to consider stocks, bonds, or ETFs.
If you’re more risk-tolerant, you may want to consider stocks in the mid and small cap sector.
Step three: Build your trading strategy
Analyzing charts, reviewing market trends, reading the news, monitoring economic indicators, and spending time in the Moomoo community can all help determine your trading strategy.
After utilizing these research sources, a trading strategy may include the answers to the following questions:
What markets are you trading?
What’s your trading period?
What tools are you going to use to determine trends?
What are your entry and exit price points?
Have you written down your trading rules?
Your trading strategies can help you stick to your trading plan. You can also use different strategies to help accomplish varying goals and when you’re ready, enter your trades online with these in mind.
Step four: Manage your trades
Once you place your trades, you’ll need to manage your open positions. That’s because markets are always moving — either in your favor or against it. Depending on these changes, you may want to consider amending your orders.
Here are some considerations for trade management:
If a trade moves against you, you may want to manage your risk by considering a stop-loss order at a price that’s under a support level if the stock goes below that level.
If a trade goes your way, you may want to sell part of your position at your initial target price while allowing the remainder of your position to stay put.
After reviewing (and potentially changing) your trades, it’s important to track, review, and evaluate. Are you still positioned to meet your investment goals?
This analysis will also help enable you to identify trading patterns, your strengths, and areas for improvement, such as additional education or various products. It’s also important to write these thoughts and actions down to track your progress and patterns.
Step five: Amend your trading plan regularly
Your trading plan is a living document, and an ongoing review is important to keep it relevant. Mistakes will happen but there are many ways to expand your knowledge, such as taking courses, reading the news, watching webinars, and speaking with fellow traders. It’s not a one-size-fits-all approach, as it should be unique to you.
Markets are dynamic — and your trading plan should be, too. Be ready to make changes as markets, your goals, and your skills evolve over time. Learning more about the markets, selecting products to trade, and pivoting are key components of this ongoing process.
At moomoo, we’re here to help you with your investment journey, serving as your partner and providing the tools to assist you.