Blog

The Difference Between a Trading Strategy and a Trading Plan

Site Administrator | February 3, 2012

Responsive image

Special thanks to Markus on the guest post below:

You know that as a trader you need a solid trading plan. A solid trading plan is the cornerstone of your trading business. Unfortunately many traders think that all they need is a trading strategy. This is NOT the case! Let me explain the difference between a trading strategy and a trading plan:

trading strategy tells you when to enter and when to exit trades. A trading plan is more comprehensive than a trading strategy. A trading plan covers at least seven elements:

  1. The market(s) you want to trade.
  2. The timeframes you want to trade, e.g. 5 min, 10 min, tick or range bars.
  3. brief description of the strategies you want to trade and when to use what strategy.
  4. The entry rules of the strategies.
  5. The exit rules of the strategies.
  6. Other important rules, e.g. when to trade and when not to trade.
  7. The money management approach you are using.

Click here if you would like to see an example of a trading plan found in my best selling book.

You will notice that I approach the markets with multiple trading strategies. Every professional trader uses more than one trading strategy for a very simple reason: Typically trading strategies are either trend-following or trend-fading. Trend-following strategies work well in trending markets, but they do not perform well in sideways markets. You can't trade ONE strategy all the time! When the markets are trending, you use a trend-following strategy, and when they are going sideways, you use a trend-fading strategy.

Here's the hierarchy in which I use my trading strategies:

  1. Whenever I can, I use the Simple Strategy, which is a trend-following strategy. When the markets are trending, THIS is the trading strategy of my choice, since I can use a larger profit target than stop loss. Typically trend-following strategies are more rewarding than trend-fading or scalping strategies, and that's why THIS strategy is my first choice.
  2. When the markets are moving sideways, I use the Ping Pong Strategy, since this strategy is perfect for sideways markets.
  3. If I missed an early entry into a trend, I use the Boomerang Strategy to catch the tail-end of a trend. Typically you will see that a market starts to trend, then retraces and after a short pause it continues the move in the direction of the trend, even if it is just for a few points. The Boomerang Strategy takes advantage of these situations.
  4. In the beginning of the trading day and during "transitions" I like to use the Seahawk Strategy. This strategy is a scalping strategy and as such the average profit per trade is rather low, but I love trading this strategy when I can't use any of the other strategies. As an example, the markets often try to find a direction in the first 5-10 min of trading. During this time it is hard to tell if the markets will trend or go sideways, so I use Seahawk and try to get a couple of quick trades while the markets make up their mind. And I like to use it at the end of the trend: Often I see that the trend loses steam and might be over, but the it takes 2-3 more bars or candles before I can tell for sure that the market is moving sideways and therefore use the Ping Pong strategy. I could sit on my hands or trade Seahawk while I am waiting for a clear entry signal according to Ping Pong.

In The Complete Guide to Day Trading I explain in detail when I use what strategy. It's really not that difficult, and if you watched my video on "The Three Best Indicators For Day Trading", then you already know how to identify the beginning and the end of a trend.

And that's the main purpose of a trading plan: Defining what trading strategies you trade and when. Take a look at my trading plan to get some ideas. And then start writing your own trading plan. A trading plan is something very personal; it's something that fits YOUR trading personality and style. Something that YOU are comfortable with, since YOU will trade it every day.

Take the time to write a solid trading plan that you can then test on a simulated account.

Hope this helps.

Markus Heitkoetter

P.S. Feel free to read my best selling book The Complete Guide to Day Trading here, as my gift to you!