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Trading Foundations · Lesson 04 of 06

Building a Trading Plan

A trading plan defines your decisions before you enter a trade. It turns a general market opinion into rules you can practise and review.

In this lesson
Learning journal
Course outline · Lesson 04 of 06
  1. 01Understanding Trading and Risk
  2. 02Reading Charts and Timeframes
  3. 03Identifying Market Structure
  4. 04Building a Trading Plan
  5. 05Position Sizing and Managing Exposure
  6. 06Keeping a Trading Journal
Observe

Your plan should include:

  1. Instrument and timeframe.
  2. Setup: the market conditions you need.
  3. Entry trigger: the specific event that permits entry.
  4. Invalidation: evidence that would contradict your idea.
  5. Exposure: your planned position size and potential loss.
  6. Exit rules: when and how you intend to leave.
  7. Costs: relevant spreads, commissions, and financing.
  8. No-trade conditions: reasons to stay out.

A setup and an entry trigger serve different purposes. The setup describes the context; the trigger specifies the event you will act on.

Invalidation explains when your original reasoning no longer holds. A stop-loss order can help manage exposure, but actual execution may differ from its requested price.

A profit target is a planned exit, not a guaranteed outcome. A favourable reward-to-risk ratio alone does not establish profitability. The frequency of wins and losses, execution, and costs also matter.

If your conditions are absent or unclear, staying out can be the correct action under your plan.

Practise

Practical exercise

Write a hypothetical demo trading plan using all eight items above. Record it before looking at subsequent price movement.

Afterwards, review whether the conditions occurred and whether your actions followed the plan. Keep your original rules alongside your review.

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Review · 5 questions

Knowledge check

Write your answers in your learning journal before checking the answer key.

1. When should you write your plan?

  1. A. Before entry.
  2. B. After seeing the result.
  3. C. Only after a loss.

2. What is an entry trigger?

  1. A. A guaranteed profit.
  2. B. A specific event that permits entry.
  3. C. Any movement in price.

3. What does invalidation identify?

  1. A. Your preferred profit.
  2. B. A trading fee.
  3. C. Evidence contradicting your idea.

4. Does a favourable reward-to-risk ratio alone prove profitability?

  1. A. Yes.
  2. B. No.
  3. C. Only with leverage.

5. What should you do when your entry conditions are absent?

  1. A. Follow your no-trade rule.
  2. B. Increase your position size.
  3. C. Enter because you have waited.
Reveal the answer key
  1. A — Advance rules allow an honest review.
  2. B — The trigger defines the event required for entry.
  3. C — Invalidation identifies when your reasoning fails.
  4. B — Outcome probabilities, execution, and costs also matter.
  5. A — Staying out can be a planned decision.