Before we get in the details of how to develop a successful trading plan, it is important to learn what a trading plan actually is. A trading plan is a comprehensive decision-making tool available to you that you can use in your trading activity. It is your complete plan of action that lets you decide what to invest, when to invest, and how much to invest. It should be noted here that every trader has their own trading plan. The trading plan of other traders can be used as an outline but the fact that the risks, capital, and other factors are exclusive to traders and yours might be different.
A trading plan is a guide of written rules of what you need to take your trades. You can have some checklists to determine what you want to see in the environment of your trade set up. When all those elements come in your environment of your trade setup, you can execute your trade.
Back-Testing the System
Just when you have your initial plan, what you can do is go back to the charts and look for the past data. With this data, you can perform back testing of your system. This can be done by checking where the environment that you outlined through the checklist existed and how it affects the trading patterns on the chart.
In this case, you can also take the help of a spreadsheet to mark the points on how and where the points existed. Then close the sheet and examine the chart if the points you have marked on the chart was a win or a loss situation. You can do this as many times as you want. Not only will it polish your skills but enhance your knowledge of making the assessments of the market as well. Moreover, you will end up having more data and ultimately a better representation of the strategy and plan.
After that you should assess the number of wins in that environment for the data in different periods of time. If the win ratio comes out let’s say 7 out of 10 times i.e. 70% or more, your rules are correct and you are going to make the right prediction 7 out of 10 times when you actually trade.
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Forward-Testing the System
The key to develop a successful trading plan does not only involve back-testing of the system but forward-testing as well. In this technique, you have to put your data or the environment you created earlier using the checklist to test with the future data to see if it comes out victorious or not. Forward testing will give you the confidence on the system you have created to create a trading plan.
This is just a simple technique to develop a successful trading plan of your own. There are other methods available as well that you can choose like deciding your own capital, choosing the risk factor, how much to trade, and when to trade.