How to make a trading plan and confirm it’s solid

A solid and realistic trading plan is essential to everyone wishing to be profitable. You should ask yourself many basic questions such as “Why am I trading?” Even if I consider that all the steps are important in building your trading plan, I’m convinced that money management is THE foundation. It’s money management that saved me tons of money by stopping me to do stupid mistakes, like holding a sinking stock for too long.

So how do you build an effective money management plan? You need four parameters:

•        Your starting capital
•        The probability of you winning a trade
•        The percentage of profit you accept before closing a position
•        The percentage of loss you accept before closing a position

Your starting capital is easy to know, it’s simply the money you have available for trading.

The probability of you winning a trade is best determined by your trading history. Simply add up all the trades you did where you made a profit and divide that number by your total amount of trades. You will get a number between 0 and 1, hopefully closer to 1 than 0!

The percentage of profit you accept before closing a position is basically a take profit rule, or a floor on your profit. You could either say “Every time I get to 10% I sell automatically” or “If I get to 10% I’m setting a 10% limit rule.” The same goes for your stop loss.

I programmed a calculator in Excel where you simply have to input those 4 parameters. Then, click “Calculate”. 

Click here to download the calculator

This calculator will calculate your expected profit after 30 samples of 50 trades each. The goal for you is to find the most profitable strategy for yourself.

You don’t really have control on your probability of winning and your starting capital. They are what they are. However, you have complete control on your take profit and your stop loss. I noticed that even if I put so much emphasis on them, many people are just ignoring them. You can’t. You will lose without them, or be lucky and think it’s talent.

Once you have a solid money management plan, 80% of your trading plan is complete.

Don’t try to time the market for profit, simply respect your trading plan.