Creating a Trading Plan: Key Steps to Success in the Stock Market
I’m a big proponent of creating a trading system. Even if you are a novice, I encourage you to start the documenting process. As you learn more, you can modify or add more nuance to your trading system. You can create a stock investing journal and record keeping of your thoughts and vital information. You can start by documenting some basic things:
1. YOUR OBJECTIVE
Why are you buying this stock? (This could be several paragraphs or very concise). Is this a long-term position or a short-term position? Are you going to sell it, if it tanks? Ride the roller coaster? Buy more if it comes down?
2. Risk Management
What is your risk tolerance, as it pertains to your overall money management (Are you getting carried away investing more than you can afford to lose?). Traders often set a maximum percentage of their capital that they are willing to risk on a single trade to avoid significant losses.
3. EXIT PLAN
Do you have an exit plan, which outlines when/why you will get out! Is there a price point you will get out at? If it drops 10%, 20%, 50%, 80%? When will you get back in if the stock turns on you? This is part of reversal strategy-covered later. Which will prevent you from losing everything if you sell and the market turns on you and you don’t get back on!
4. TRADING JOURNALS
Document your thoughts as the price rises and falls and as you apply different strategies. Even if you are not trading, enter your thought process weekly, monthly, etc. In addition to just your thoughts, keep tab on your wins/loss. I like to create an excel spreadsheet, that has all my trades from ticker symbol to profits and losses I have incurred. This keeps me in check, if I’m constantly losing money and major indices are making money, then I might as well invest in the indices and not trade individual stocks myself!
5. BACKTESTING
Before implementing a trading strategy, many traders use historical data to backtest their system. This helps in understanding how the strategy would have performed in the past and making necessary adjustments.
In Summary, emotional discipline, a well-documented trading plan can help traders maintain emotional discipline. Predefined rules for entry and exit can prevent impulsive decisions based on emotions. The stock market is constantly evolving, and successful traders continuously learn and adapt to their strategies. Documenting thoughts and strategies aids in this ongoing learning process.
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