A trading plan is something that is absolutely essential, but it is not always something that every trader has considered before committing to
placing their hard-earned money in the stock market. You would have heard by
now the saying; ‘If you fail to plan, you plan to fail.’ Many traders have found this to be fact not fiction.
A trading plan is of high importance to your trading success. All that a trading plan is is your road map to success in the stock market, without it you will get lost. A trading plan is exactly the same as a business plan. It is a key that can unlock your trading potential and help you make more money while hopefully losing less money. Without a plan you will wind up as just another statistic, (part of the 95% of new traders that lose and quit). So by Formulating a solid set of rules at the very beginning, and then sticking to them and developing a trading plan is essential for successful trading management and longevity. Planning:
* Decide what your objectives and risk profile are, this will allow you to create a portfolio that reflects your goals. But you must also detail how you plan to achieve them. * Construct a balanced portfolio by selecting the right type of shares. * Decide how much of your capital you want to invest in the various stocks / portfolios. Remember; never put all your eggs in one basket. * Create entry and exit criteria that you can live with! * The target price of the stock will help you to figure out your risk to reward ratio, and it will also give you an exit point in your trade. *Decide which basic issues such as what your trading goals and objectives are. You wil need to also include information in your plan on how you will determine your position size, your capital allocation and stop loss methods. It is essential that your plan blends in with your lifestyle and personality.
No two traders, and trading plans, are the same. Remember of the first rules of a trading plan is that it must be written down.
Plan your Markets:
Think about in which markets you want to trade in? I.e. (Stocks, options, futures, currencies).
Stock selection:
You may also decide to make firm rules for the criteria a stock must fulfil before it becomes part of your portfolio. For example;
* Whether the stock has to have a certain market capitalisation, * Does it have a generous dividend yield and franking credits, Are they buying back their own shares on a regular basis?
* Do you require a certain minimum Profit/earnings ratio threshold? * Is it an ethical investment?
Risk:
Risk capital is money that can be lost without jeopardizing your financial security or life style. Managing your risk and money will be one of the keys to your success in the markets. You need to work out the maximum amount at risk for each trade. Remember that once you are using gearing this also increases the risk accordingly.So as long as you know what you’re doing and understand the risks involved then you will be all right. But again there is no guarantee on this.
Stop Losses:
Generally, traders making money without big daily loses have the best chance of sustaining positive performance. Stop loss orders instruct your broker to close at a particular price position.So if prices happen to move adversely to a specific level which you have already previously set. They are activated and therefore minimise your losses.Of course they can be used to lock in your profits as well.. Analysis.
Technical analysis is NOT the trading plan. Technical analysis is a path which enables you to reach your goals. This simply means that you use technical analysis to manage your trades better. In conclusion,
A definition of successful trader is one who has their trading plan written down, who also applies Risk and Money Management rules, together with solid Stop Loss techniques which not only maximizes their profits, but minimizes their losses as well.
