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What a plan decides in advance

Lesson 2 · about 9 min

A trading plan answers six questions. If any one of them is left to be answered at the moment of the trade, that is where the plan will fail, because that is where the market will apply pressure. The six are: market, session, setup, risk, exits and review.

1. Market

Which instruments, exactly. Not "stocks" but a list, or a rule that produces a list: "the five most liquid US index ETFs", "EUR/USD and GBP/USD only", "MES and MNQ", "BTC and ETH perpetuals on one exchange". The rule must be narrow enough that a new instrument cannot be added on a whim because it is moving.

Why narrow: every instrument has its own personality, its own typical range, its own liquidity holes. An edge in one is not an edge in another, and a trader who is in a new instrument every week is a beginner in every one of them.

2. Session

Which hours, in your time zone, and which days. "US cash open to 11:30am ET" or "London session, 08:00 to 12:00 UK" or "only the daily close, evaluated once at 4pm". Include what you do not trade: the first two minutes, the last ten, lunch, the day before a holiday, scheduled news at the top of the hour.

Session matters because the same setup behaves differently at different times. A breakout at 9:35am and a breakout at 1:15pm are different trades with different follow-through, and if your plan does not distinguish them, your journal will average them into mush.

3. Setup

What has to be true for a trade to exist. This is the hardest line to write and Module 2 is entirely about it. For now, the requirement: the setup must be a checklist of conditions a stranger could verify from a chart, with no adjectives that need a judgment call. "Higher low on the 5-minute after a break above the overnight high, with volume on the break above the 20-bar average" is a setup. "Nice bounce with momentum" is a feeling.

4. Risk

The numbers from the risk plan: 1R as a percentage of the account, where the stop goes, maximum heat, daily and weekly loss limits. If you have done that course, copy the twelve lines in. If you have not, do it before this one; a trading plan without risk numbers is a plan for how to lose money on purpose.

5. Exits

How the trade ends, in every case. There are more cases than most people write down:

Case Example rule
Stop hit Hard stop in the platform, never moved away from price
Target hit Close 50% at 2R, remainder trails
Trail Remainder trails one tick below each new 5-minute higher low
Time stop If not at 1R after 30 minutes, close at market
Invalidation If price closes back below the breakout level, close regardless of R
Session end Flat by 11:30am ET, no exceptions

Every case needs a rule. The one you leave out is the one that will cost the most, because you will invent a rule for it live, with money on the line.

6. Review

When you look back, what you look at, and what can change as a result. "Every Sunday, 30 minutes, the weekly template from Module 4. Rules change only at the monthly review, only with 30 or more trades of evidence." Without this line the plan calcifies or churns: either it never changes because there is no moment for it, or it changes every Tuesday because a bad Monday felt like a signal.

Key idea: Market, session, setup, risk, exits, review. Six decisions, all made before the open. The one you leave for later is the one the market will make for you.

What is deliberately not on the list

Opinions about direction. Forecasts. Price targets for the year. Which way the Fed is leaning. A trading plan is about what you will do when a condition appears, not what you think will happen. The moment a plan contains a view, the view starts filtering the setups, and you will find yourself "waiting for a long" while three valid shorts go by.

Also not on the list: a profit goal. "Make $500 a day" is not a decision you can execute. It is an outcome, and putting it on the plan invites forcing trades to reach it. The only daily number on the plan is the loss limit.

Try it: Take a blank page and write the six headings. Under each, write one line for how you trade now, honestly, even if the honest answer is "whatever looks good". Count how many of the six have an answer a stranger could follow. That count is your starting point; the course aims to take it to six.

Recap

  • A plan decides six things in advance: market, session, setup, risk, exits and review.
  • Market and session are lists, not categories. Narrow beats broad because every instrument and every hour behaves differently.
  • Exits need a rule for every case: stop, target, trail, time, invalidation and session end.
  • Review needs a fixed time and a fixed threshold for change, so the plan neither calcifies nor churns.
  • Direction opinions and profit goals are not on the plan. They filter setups and force trades.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Breakout and retestPrice stalls under one level, pushes above it, comes back to touch it from above, then continues higher.pricetimeold resistancenow support1price keeps stalling2breaks above3pulls back and retests it4and carries on
Breakout and retest. Price stalls under the same level several times, pushes above it, then drops back to touch it from above before carrying on. That touch is the retest, where the old ceiling is tried as a floor. A break that falls straight back under it is a false breakout.
The spread of outcomes behind an expectancyA histogram of forty trades: a tall block of small losses on the left, a low spread of larger wins on the right, and a line marking the average outcome.NUMBER OF TRADES051024 LOSSES, AVG −$20016 WINS, AVG +$600EXPECTANCY +$120−$400−$200$0+$200+$400+$600+$800PROFIT OR LOSS PER TRADEexpectancy = (40% × $600) − (60% × $200) = +$120 per trade
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.
Risk and reward on one tradeA price scale showing an entry with a stop two points below and a target six points above, so the reward band is three times the risk band.PRICETARGET 106.00ENTRY 100.00STOP 98.00REWARDRISK6.00 pointsthree times the risk2.00 pointsthe most you loserisk : reward = 1 : 3
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.