The Importance of Having a Trading Plan

By Griffin Cooper

Forethought to action; Sense of agency; What’s a mistake?; The right way to be right;

Trial and error = massive improvements

One of the most foundational and essential elements for profitable, consistent trading is having a trading plan.

One reason a trading plan is so important is that it forces some kind of planning and forethought to the act of trading.

By requiring myself to have a written plan, I’m forced to take the time to give some thought to what I believe is an edge and will make money in the market. I must have some reason to enter a trade and participate in the market.

So what is it? What do I believe is a good way to operationalize those ideas that be implemented and applied? I would contend that the plan itself does NOT have to be amazing. It doesn’t have to be the best plan ever. But I do have to have something written down that I plan to follow.

To use another driving analogy, it’s like putting on your seat belt before driving your car. It introduces some degree of agency and sense of control when you’re about to dive into a chaotic environment. It reduces your chance of “accidents” (collisions?).

A trading plan also helps give you a yardstick to measure your trading execution. Van Tharp wrote that “anytime you don’t follow your plan it’s a mistake, and if you don’t have a trading plan everything is a mistake.”

I have found this to be true in my trading experience as well. Assessments and debriefings of your trading is an important part of any successful trader’s process.

But just basing that on “did I make money today” can lead to repeating the same un-useful behaviors if every day you do something different. If you have a plan that you’re committed to following, you can assess your trading on the basis of “did I follow that plan?”.

There’s an important psychological aspect to having a plan a well. It gives you something to be right about.

Trying to be right about every trade is pretty painful, as you never know what’s going to happen when you enter the market. You can’t will the trade to work. It’s out of your control. But you can control if you’re going to follow your plan or not (can’t you?).

By following a trading plan for a period of time or number of trades, it naturally gives you something to objectively assess and then look for improvements.

You can look back during a periodic review of your trading performance and see how your plan is working. Is it producing the desired results given the market conditions for that period of time? Is there something I want to change? Is it not working at all for me? Is there a major conflict between the market, system and myself? Should I try something else? I don’t know any way to make these important conclusions without having a trading plan that you can base your decisions on.

Without a plan that can evolve and adapt, it can often lead to chasing your tail. But by tweaking a plan little by little, we can tap into the ultra-powerful process of trial and error.

It’s by the tinkering process that most of civilization’s major advances have occurred and I think the same is true for trading. It’s not about trying to find the perfect plan, but about committing to having a plan that’s good enough to get started that I improve little by little, and over time will produce major improvements.