Trading plan

A document written before positions are taken rather than during them. The sections most commonly described in the literature are the markets and instruments covered, the conditions under which a position is opened, the conditions under which it is closed both in profit and in loss, how size is determined, what limits apply to total exposure at any one time, and how and when the results are reviewed. The purpose usually given is that a decision made in advance is made under different conditions from a decision made while a position is moving.

A plan is not a strategy and not a forecast. A strategy is one method of taking positions, and a plan is the framework that says which methods are used, under what limits, and in what circumstances trading stops. The parts that carry the most weight are the ones that are arithmetic rather than judgement: how size is calculated, what the maximum exposure is, and what happens after a stated drawdown, because those can be checked afterwards against what actually occurred.

Two honest qualifications belong with the term. A plan is a description of process and carries no claim about outcome: writing rules down does not make them profitable rules, and a documented method can lose consistently. And practitioners disagree sharply about how prescriptive a plan should be, one camp holding that discretion is where an edge lives and the other that discretion is where discipline is lost, an argument that has been running as long as the literature and has not been settled by it.