A trading plan is a definite requirement for becoming a successful stock trader. It can help you over the usual pitfalls that a trader may encounter in his career. But let’s be clear here: perusing a few books about stock trading and drawing up a few simple rules on a notepad does not a trading plan make. That’s pretty much a picture-perfect example of a bankruptcy waiting to happen. Trading plans require a lot of work, and they need to be more detailed than having said: “buy low and sell high.”
To set it all up, first, you have to sit down and take stock of what you have. This is more than in the monetary sense. You should know what you’re knowledgeable about and what you’re capable of handling. Your trading plan should match you and shaped by your quirks. If you don’t take into account your personal temperament when coming up with a trading plan, it would feel artificial when you’re putting it into action, and you would sometimes have the urge to not follow it. A natural-feeling trading plan is much easier to follow. You should also set your boundaries: just how much money are you willing to risk? How much loss are you willing to absorb? Knowing your limits is one of the important parts of making a business plan.
After you’ve done your self-reflection and have realized your limits, you should now concentrate on what you’re aiming at. Specifying a particular profit target for a specific time period is one way of doing this. Aiming for a hundred dollars a day when trading helps you focus on gaining that amount of money. While you’re doing this, you should also look into what markets you’re targeting. You should choose a market or a commodity you have knowledge about or are interested in. Interest will help keep you attentive to market conditions and knowing which way the wind is blowing can definitely help you be on top of changes in the market.
When you’ve picked out your market then it’s time to get into the nitty-gritty details of things. This means you have to hit the books and look at the performance of the several stocks found in your selected market. You should look at them all and see how they’ll fit in with your projected trading strategy. Stocks that have shown consistent but slow growth would be good for conservative trading plans while more volatile stocks can find their place in a more risky strategy.
After picking out the stocks, it’s time to decide about your entry and exit strategies. Knowing when to jump in and start buying stocks isn’t just a matter of buy low and sell high. Experienced traders looking for a particular price point to hit where they are sure to get a profit. They also time their buys to a particular time, knowing when the market has reached a particular limit. Good research should be able to give you this information. Your exit from the market is equally important. The price of shares may continually rise, but your plan should indicate where you should start selling it off, even at the loss of potential profit. This is the same for when the price is going down. Your exit strategy outlines how low you want to go before actually selling the stock, even at a loss. It sounds strange to follow your plan while taking a loss, but if you made a good trading plan, it should take the chance of potential loss into the equation.
All of it may sound easy but, trust me on this, it will take a lot of work to create a trading plan that you’ll be comfortable with. So what are you waiting for? Go on and make a start with your life as a trader.