Master the Art of Trading: Essential Tips for a Trading Plan vs Strategy

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4 - 6 minute read

When it comes to trading, it’s important to understand the distinction between a trading plan and a trading strategy. A trading plan outlines the broad details of your trading approach, including your risk management, the markets you trade, the hours you trade, the time you put into study, and the trading strategies you deploy. A trading strategy, on the other hand, is a specific approach to a trade, including the details and nuances of how it is executed. Here are some key points to consider when developing a trading plan and trading strategy:

Trading Plan

A trading plan outlines the broad details of your trading approach, including risk management, the markets you trade, the hours you trade, the time you put into study, and the trading strategies you deploy. It should be a living document that is updated and refined as you gain more experience and learn from past trades. A trading plan should be clear and concise, providing a roadmap for your trading activities.

For example, a trading plan might include details such as:

• The markets you trade (e.g. S&P 500 index, currencies, commodities)
• The hours you trade (e.g. 9:30am to 4:00pm EST)
• Your risk management parameters (e.g. 1% of account per trade, 5% per day)
• Your trading strategies (e.g. trend following, breakout trades, counter trend trades)
• The time you allocate to studying market analysis and reviewing your trades (e.g. 2 hours per day)

Trading Strategy

A trading strategy is a specific approach to a trade, including the details and nuances of how it is executed. A trading strategy should be based on a thorough analysis of the market and should have clear entry and exit points, as well as risk management parameters. A trading strategy should be tested and refined through backtesting and live trades, with adjustments made as necessary to improve its effectiveness.

Here are some examples of different trading strategies:

Trend Following Strategy

This strategy involves identifying the overall trend of a market and following it by buying in an uptrend and selling in a downtrend.

• Entry: A trade is entered when the market shows a clear trend and there is a breakout of a key resistance or support level.
• Exit: A trade is exited when the market shows signs of a reversal or when a pre-determined profit target is reached.
• Risk Management: A stop loss is set at a level that allows for some market volatility, but protects against significant losses.

Breakout Trade Strategy

This strategy involves buying or selling when the price of an asset breaks out of a range or pattern.

• Entry: A trade is entered when the price breaks out of a range or pattern and is confirmed by high volume and/or other technical indicators.
• Exit: A trade is exited when the breakout fails and the price returns to the range or when a profit target is reached.
• Risk Management: A stop loss is set at a level below the range or pattern, allowing for some volatility but protecting against a false breakout.

Counter Trend Trade Strategy

This strategy involves taking trades in the opposite direction of the trend, looking for oversold or overbought conditions.

• Entry: A trade is entered when the market shows an overbought or oversold condition and there is a reversal signal such as a divergence on an oscillator indicator.
• Exit: A trade is exited when the market returns to a more neutral condition or when a profit target is reached.
• Risk Management: A stop loss is set at a level that allows for some market volatility, but protects against a strong trend continuation.

Having a trading plan and trading strategy is crucial to the success of any trader. A trading plan provides a broad outline of your approach, while a trading strategy outlines the specific details and execution of a trade. It’s important to continuously review and refine both your trading plan and trading strategies to ensure that they are effective and aligned with your overall trading goals.