A trading plan is a written set of rules for deciding what to trade, when to act, how much money to put at risk and when to stop. It should answer the awkward questions before an open position makes them harder to answer calmly.
Start with objectives, a trading method, risk controls and a record of decisions. These form the core of the CME Group trading plan framework. Then turn each part into instructions you can follow and check. A plan cannot make an unprofitable strategy profitable, but it gives you something concrete to test rather than a collection of good intentions.
Set the purpose and boundaries of your trading
Write down what the account is for. Testing a method with discretionary money is a different objective from building retirement savings. Keep those purposes separate rather than switching between trading and investing objectives whenever a position moves against you.
Choose process goals you can control. “Record every eligible signal and follow the sizing rule” is measurable. “Make £500 every week” is an ambition, not an operating instruction. The market has no obligation to meet a household budget.
State the money available for trading and the amount you could lose without affecting essential spending. Keep emergency savings outside the account and do not fund trading with credit card borrowing. Paying down expensive short-term debt and building a cash reserve come before taking investment risk (FCA guidance on financial readiness).
Next, define your practical boundaries: permitted products, account type, trading hours, time zone and expected holding period. If you cannot monitor positions during working hours, do not write a plan that requires constant attention. Either change the method or leave that method alone.
Turn your strategy into observable rules
A strategy describes the opportunity you intend to trade. The plan adds the conditions under which you may trade it. Write both clearly enough that another person could inspect the same information and understand your decision.
“Buy strong shares after a pullback” leaves too much open. What counts as strong? How far must the price pull back? Does the signal require a completed candle, or can it appear during the session?
For each setup, document these four parts:
- Eligible market: the instruments and market conditions allowed.
- Setup: the pattern or event that puts a trade under consideration.
- Entry trigger: the observable condition that permits an order.
- Invalidation: the condition that cancels the idea before entry or requires an exit afterwards.
As an illustrative wording exercise, replace “buy a breakout” with “consider an entry only after a daily close above the highest price of the previous 20 completed sessions”. That is a testable signal, not evidence of a profitable strategy. You would still need an entry price rule, an order expiry, exits and cost assumptions.
Add exclusion rules too. Specify when spreads are too wide, which scheduled announcements prevent entry and what happens if the price moves beyond your permitted entry range. No qualifying signal, no trade. A watchlist is not a list of obligations.
Write the risk rules before calculating position size
Set separate limits for each trade and for the account as a whole. Record the planned loss budget per position, the maximum number of open positions and the maximum combined exposure. These are distinct decisions within a trade plan’s risk management rules; a small individual position does not automatically make the whole account conservative.
Define the balance used for sizing. You might use current account equity, including open gains and losses, measured at a stated time. Whatever convention you choose, document it so that position sizes do not depend on whichever account figure looks most convenient.
For a simple cash share trade, an illustrative sizing calculation is:
Number of shares = (planned loss budget − estimated costs and execution allowance) ÷ distance from entry to stop.
Suppose the account contains £10,000 and the hypothetical trade budget is £50. The proposed entry is £12.50, the stop is £12.20, and the assumed allowance for costs and execution differences is £10. The calculation is (£50 − £10) ÷ £0.30 = 133.33. Rounding down gives 133 whole shares, with a purchase value of £1,662.50.
The planned price loss is £39.90. Adding the £10 allowance produces £49.90. These figures are arithmetic assumptions, not recommended settings. Replace the allowance with a realistic estimate that includes applicable charges and transaction taxes; recalculate if those costs change with the order size.
The budget is not a guaranteed maximum loss. Ordinary stock stop orders can execute beyond their trigger price. Stop-limit orders constrain the execution price but may remain unfilled. Account for both risks rather than treating either order as insurance (SEC investor bulletin on stop and stop-limit orders).
Specify exits and permitted changes
Write the exit instructions alongside the entry rules. Cover an adverse price move, a favourable move and a trade that goes nowhere. State whether you use a fixed target, a trailing exit, a time limit or another defined condition.
For positions held over several sessions, document exactly how stops, targets and trailing orders fit the method. A trailing rule needs a calculation and an update time. “Move the stop when the trade looks comfortable” is not enough.
Decide whether partial exits and additions are allowed. If they are, specify their triggers and recalculate the remaining exposure. If they are not, say so plainly. Do not leave room to rename an unplanned addition as “position management”.
Include a rule against widening a protective stop simply to postpone taking a loss. Any permitted adjustment should follow the tested method, not a desire to recover the entry price. Also document order expiry and the treatment of unfilled or partially filled orders, including how the remaining exit orders will be checked after a position closes.
Define when trading must pause
A trading plan needs rules for stopping new activity, not just opening positions. Write a session loss threshold where relevant, a longer review threshold and a response to an operational error or deliberate rule breach.
Define how each threshold is measured. Does the session calculation include open losses and costs, or only completed trades? When does it reset? What happens to positions already open? Rules for daily loss limits and trading frequency should answer these questions before the session starts.
For example, you could define a pause using the fall in account equity from the session’s opening value, adjusted for deposits and withdrawals. Specify whether the response is to stop new orders, cancel pending entries or close positions. Do not assume “stop trading” means the same thing in every situation.
Address related positions as well. When reviewing a proposed trade, ask whether it repeats an existing exposure to the same company, sector, currency or market event. Write a combined exposure rule rather than relying only on a maximum trade count.
Use a compact trading plan template
Keep the operating version short enough to consult before placing an order. Store detailed research separately. The following template gives each decision a home without turning the plan into a document nobody opens.
| Plan section | What to write |
|---|---|
| Purpose and capital | Why the account exists, its allocated capital and the money excluded from trading. |
| Markets and schedule | Permitted instruments, account type, analysis times, trading hours and time zone. |
| Setup and entry | Qualifying conditions, entry trigger, permitted price range, order type and expiry. |
| Trade risk | Loss budget, sizing formula, cost assumptions and the account value used for calculations. |
| Account exposure | Combined position limits, related exposure restrictions and treatment of pending orders. |
| Exits | Initial stop, profit-taking method, time exit and any permitted adjustments. |
| Pause conditions | Loss thresholds, rule breaches, unsuitable conditions and the required response. |
| Operational problems | Actions for outages, rejected orders, missing data and uncertain execution status. |
| Records and review | Journal fields, performance measures, review dates and approval conditions for changes. |
Give the document a version number and an effective date. If a field contains “use judgement”, explain what that judgement considers and how you will record it. Otherwise, the exception can swallow the rule.
Test the written rules before using real money
Test the plan you actually wrote, including its exclusions, costs and order assumptions. Do not test a loose idea and then trade a more convenient variation.
Set out how you will use historical testing and simulated trading, what evidence you will collect and what would cause you to reject the method. The separate guide to backtesting, forward testing and strategy validation covers that research process in more detail.
For the plan itself, record acceptance criteria before examining results. Consider net results, losses from previous account peaks, trading frequency, sensitivity to higher costs and whether the method fits your schedule. Avoid making a single attractive return figure the entire pass mark.
Treat the testing stage as an operational rehearsal too. Check whether the rules are clear enough to apply consistently, whether your order instructions behave as intended and whether the required information arrives in time. Do not assume a simulated fill proves that a live order would receive the same price.
Record decisions as well as results
Build a journal that lets you reconstruct each trade. Record the plan version, setup, signal time, intended entry, stop, target, size and estimated costs. After execution, add actual fills, actual charges, the exit reason and any deviation from the plan.
Keep two separate assessments: financial outcome and rule compliance. A profitable trade taken outside the rules is still a breach. A losing trade taken correctly is not, by itself, a reason to rewrite the method.
Review results after costs, along with average gains, average losses and the largest fall from a previous account peak. Record skipped signals and rejected trades when practical; these help you check whether you applied the selection rules consistently rather than remembering only the trades you took.
Put reviews on the calendar. At each review, distinguish among unclear instructions, execution mistakes, unexpected costs and weak strategy results. Record any proposed change, its reason and the testing required before adoption. Avoid changing several rules at once and then guessing which change mattered.
Prepare for mistakes, outages and the urge to recover losses
Write a short contingency procedure for a lost connection, a rejected protective order or an order whose status is unclear. Keep verified contact details and an alternative way to access the account. Check the status of an uncertain order before sending another one.
Specify which order features require an active platform connection and which remain active without it, after confirming the arrangements with your provider. The plan should reflect the account’s actual functionality, not what a button label appears to promise.
Include behavioural stop conditions. These might include increasing size to recover a loss, entering without a valid signal or repeatedly overriding exit instructions. Set the response in advance: cancel new entries, step away and review the breach. The guide to loss-chasing and knowing when to stop addresses the behaviour behind those decisions.
Before adopting the plan, walk through one hypothetical winning trade, one losing trade, a missed entry and an outage. If any decision still requires improvisation, revise the wording. The finished document should tell you what to do, what not to do and what evidence would justify changing the rules.