A trading plan can help you keep calm and balanced when trading in securities. I strongly recommend that you take the time to actually write down your trading plan, rather then just decide on a few parameters in your head.
Personally, I have created several trading plans for my self – one for each trading project. That way, I can allow the plans to be more specific. Trying to create a trading plan that would hold true for all my trading projects would most likely result in a plan that is to vague to be of much use for me.
Having a highly detailed trading plan becomes even more important if you intend to base your trading on technical analysis. Technical analysis can for instance be used to trade in stocks, especially on high-liquidity markets. Unlike fundamental analysis, technical analysis is not focused on trying to analyze a company to estimate its value. Instead, technical analysis is focused on price movements in the market. The idea is to use historical price date to predict future events. A person engaged in technical analysis is known as a technician or chartist.
Once you have created a trading plan for a trading project that will utilize technical analysis you can test it by checking how profitable the plan would have been if employed earlier. This is known as backtesting. Of course, just because your trading plan works excellent on historical data doesn’t mean that you are guaranteed to make a profit using it in the future. However, by backtesting your trading plan, you may be able to spot problems with it and reevaluate the plan before it ends up costing you a lot of money.
You can sometimes use your brokers trading platform to back test your strategy. Not all brokers allow you to do this nor do every platform. If your broker use several trading platforms then you might have to use a certain platform to be able to backtest your strategy. Do not be afraid to ask your broker if they offer backtesting.
The next step is to put your trading plan through forward performance testing. During forward performance testing, you use your trading plan to trade in a live market, but all trades are “paper only”, i.e. not real trades.