French writer Antoine de Saint-Exupéry once wrote that “a goal without a plan is just a wish.” This is incredibly true in the world of stock trading – in fact, a more accurate quote might say “a goal without a plan is just a gamble if you decide to take the plunge.” Many stock traders fall victim to this fatal mistake. If you start trading without a plan in place, you’re essentially playing a dangerous game of Russian roulette with your portfolio.
The solution? A trading plan. Despite the fact that this sounds like unnecessary homework, creating a trading plan can be your key to success. This is one of the biggest steps to making consistent money. Traders who have a plan that they execute and adjust will make more money than traders who run roughshod.
But this is beside the point – you know you need a plan, but there’s a noticeable difference between “needing one” and “creating one.” There are typically seven basic essentials that any good trading plan includes. Consider these specifications and start crafting your own winning trading system.
How skilled are you?
First and foremost, realistically consider how successful you currently are at trading via objective observation. Ask yourself some basic questions, some with more obvious answers than others:
- Have you traded before?
- If you have traded, have you traded successfully?
- If you haven’t traded before, how much education have you had on day and stock trading?
- Have you created a trading system previously?
- Are you prepared to deal with either success or failure in a responsible way?
It’s important to rank yourself, and try to be realistic. Understand your limitations, your education-level and trade areas you excel in.
Are you mentally prepared?
Reflect on the last question asked in the above section: are you prepared to deal with either success or failure in a responsible way? This means mentally preparing yourself for any trading outcome, as well as the pressures associated with trading.
Like it or not, trading is stressful. Trading psychology is a truly real thing, and it not only applies to trading success in general but also a person’s aptitude for trading. The more you prepare yourself for trading, the more likely you will be to succeed.
What is your desired risk level?
Trading can be extremely high risk or incredibly low risk – and either way can work for you. This applies to your trading portfolio and how much of it you’re willing to risk trading.
Some traders are successful and work with trades that are incredibly risk. This trading mentality follows the idea of spending big and winning big – the more you risk, the bigger the reward. Other traders find success with lower risk trades that take less of their portfolio.
What goals do you have set?
What is your overall profit target? Do you have short term and long term profit goals? These are essential questions to ask yourself if trading is something you want to commit to as a hobby instead of a day job.
Many successful traders consider a number goal when they first begin trading. Maybe they want to make $100,000 or $500,000. Some even go as big as wanting to become millionaires. Understanding profit targets you want to set means knowing what your end total is, but it also means understand risk and reward ratios.
For instance, you need to take into consideration stop loss. If your stop loss statistic is a dollar loss per share, three dollars in profit is an advisable goal. A standard trading rule of thumb is don’t accept a trade that’s not profitable less than three times greater the risk involved.
Are you constantly learning?
Being a stock trader means you need to know index features like the back of your hand, and this can be difficult because they’re constantly changing. Trading is a craft that requires constant upkeep. There’s no reading one book and saying that’s that – as frequently as the NASDAQ changes, you must change too.
This means stocking up on various forms of knowledge. Bookmark high-level trading blogs and always look for new best practice information. You also need to be aware of current events. While a news story may not be about the economy on its face, tragedies and conflicts can greatly affect global stock prices and values.
Charts will be your best friend, and it’s essential you print one out at least once a week. Study the chart at the beginning of the week and look back on how much it has helped you throughout your trading at the end of the week.
Are you prepared to keep records?
It’s simply a reality you must face: trading means having to keep very detailed, thorough records. If you’re a stock trader, you’re also a record keeper – these two jobs go hand in hand. Why is this so important? First, consider your records to be a roadmap to success. When you successfully complete a trade with a high profit margin, don’t you want to know why you did so well? Writing down targets, entry and exit levels, time, resistance and opening range information can help you see why you made the profit you did.
Second, trading records help you keep up with account; an obvious plus to record keeping will come about when tax season arrives. It’s always important to know how much money you’ve made, where it’s coming from and how you can make more.
Can you assess yourself regularly?
In addition to record keeping, it’s also important to perform regular self-analysis. This isn’t just something to do on a projection cycle – no; reflect back on your trades and actions every day. After the market closes, do some simple math. Did you profit? Did you lose money? What conclusions can you draw from the day’s work?
This doesn’t have to be yet another written homework exercise, but rather a mental process. If you have a trading journal (which you should), quickly write down your reflections there. Otherwise, ponder them while you have some free time before bed and make notes of anything important to consider the next day.
Trading plans are how successful traders got to be where they are today. The backbone of any trader’s success hinges on their ability to create, test and execute a winning plan – and now you have the ingredients to create your own winning strategies.