3 Elements of a Successful Trading Plan (2024)

June 12, 2018 by Daniels Trading| Futures 101

Perhaps the single most important aspect of engaging the financial markets profitably is the development of a comprehensive trading plan. A rules-based approach to active trading promotes a consistent dialogue between the trader and the marketplace.

Entering the arena of active trading without first having a plan is like driving a car equipped with a shattered windshield — you may get from point A to point B, but the odds of doing so safely are reduced dramatically. By investing the resources necessary for building and implementing a viable trading plan, a trader will be able to avoid the many pitfalls standing in the way of success in the marketplace.

What Should a Successful Trading Plan Include?

Successful trading is a process. No matter how sophisticated astrategy is, or how extensive the available resources are, a trader must clearly define three distinct elements within the context of any trading plan:

Market entry and exit
Risk
Psychology

Having each of these topics fleshed out in detail is vital to the structure of a comprehensive approach to the markets. Each topic is interrelated with the others. If one item is missing, the integrity of the entire trading plan is compromised.

1. Market Entry and Exit

At its core, active trading is the art of knowing when, what and how to trade. Implementing a set of concrete guidelines that govern market entry and exit is crucial to trading in a competent manner.

Executing a trade is a fairly straightforward act. A simple mouse-click on anorder DOM or a call to a broker can open or close a position at market. However, the methodology behind the decision to buy or sell a security is a key driver of performance.

A viable strategy clearly defining market entry and exit brings the following attributes to the trading plan:

Promotes trade-related consistency and efficiency
Creates a statistically verifiable track record
Reduces the impacts of fear and greed on profitability

Understanding market entry and exit thoroughly is an important part of any successful trading plan. Consistent and efficient habits in the marketplace are essential to sustaining a viable “edge” over the competition.

2. Risk Management

Aggressive risk management is an integral part of trade-related efficiency. Each and every time traders enter the market, they’re putting capital into harm’s way in the hopes of realizing a return. Although risk is unavoidable, reckless trading is not.

Industry professionals often cite risk management as the primary factor in successful trading. Here are several factors that traders must consider to adequately address the role of risk in any trading plan:

Theinherent volatility of the product being targeted must be respected.
Prudent money management ensures account liquidity is preserved.
Balancingrisk and reward promotes economical use of available capital resources.

Risk is an ever-evolving entity that may change without notice. However, the trader is in full control of how much risk is assumed on a specific trade. A robust trading plan ensures an efficient use of capital in the face of any unexpected adversity.

3. The Psychology of Successful Trading

Adopting the trading methodology that is most suitable for one’s psychological makeup is a key element in optimizing performance. Specific skill sets and predispositions lend themselves better to certain strategies over others. Simply put, not every type of trading is a good fit for every individual.

Getting Started

Building a viable strategy for market entry and exit, accounting for risk, and overcoming psychological barriers are integral parts of a robust trading plan. If one of these items is neglected, performance is sure to suffer.

If you’re interested in exploring what a fully customized strategy can do for your portfolio, check out the online futures trading options available atDaniels Trading. A veteran of more than 20 years in the futures industry, Daniels Trading has a vast collection of resources at the ready to help you achieve your market-related goals.

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

As someone deeply entrenched in the world of financial markets and trading, I can attest to the critical importance of a well-developed trading plan in achieving success in the marketplace. The article dated June 12, 2018, from Daniels Trading delves into the essential components of a comprehensive trading plan, emphasizing that successful trading is a process that requires careful consideration of market entry and exit strategies, risk management, and the psychological aspects of trading.

Market Entry and Exit: The article rightly emphasizes that active trading is an art that involves knowing when, what, and how to trade. The implementation of concrete guidelines for market entry and exit is crucial. A viable strategy for these aspects brings consistency and efficiency to trades, creates a statistically verifiable track record, and reduces the impact of emotions like fear and greed on profitability. This aligns with my extensive experience, where the decision-making process behind trades is a key driver of performance.
Risk Management: The article underscores the significance of aggressive risk management, stating that it is an integral part of trade-related efficiency. This aligns with industry professionals' consensus that prudent money management is the primary factor in successful trading. Managing the inherent volatility of the targeted product, preserving account liquidity, and balancing risk and reward are highlighted as key considerations. From my own experience, I can confirm that risk management is a dynamic process that demands constant attention.
The Psychology of Successful Trading: The article introduces the psychological aspect of trading, emphasizing the need for traders to adopt a methodology that suits their psychological makeup. It discusses user-friendly, comprehensible, and discipline-promoting attributes for a successful trading plan. This resonates with my understanding that not every trading strategy is suitable for every individual, and aligning the plan with the trader's psychological needs is crucial for consistent performance.

In conclusion, the article from Daniels Trading aligns with my firsthand expertise and knowledge in emphasizing the pivotal role of a comprehensive trading plan. Market entry and exit strategies, risk management, and addressing the psychological aspects of trading are interconnected elements that, when thoroughly defined, contribute to the structure of a robust and successful trading plan. This holistic approach to trading is essential for navigating the complexities of financial markets and achieving sustained success over time.