Creating Your Trading/Investing Plan
For most of the careers in the world, we need to study for years to be able to get anywhere. And people are willing to put in the time when they want to become doctors, engineers, etc. But when it comes to the markets, most people just tend to jump into the game without completely understanding how it needs to be played.
Apart from understanding the basic terminologies and concepts, you need to create a concrete plan for yourself so that you don’t have to depend on others or second-guess your decisions when it comes to pushing the buy or sell button. So what constitutes a trading plan?
Decide on the capital you want to deploy
There is substantial risk in every trade and investment. So, the first thing you should know is that you are only risking the money you can afford to lose and any losses that might occur in the markets do not have the capacity to affect your daily life.
Select your trading style
Every person needs a trading style that compliments their personality. You need to identify if you are suited to day trading (holding positions for less than a day), swing trading (holding positions for a few days to a few months) or long-term investing (holding investments for months to years). Your trading style should be set according to the time you can give to the markets as well as your financial goals.
Deciding your strategy
You can’t expect to throw darts randomly at stock names and expect to make profits. You need a defined approach/strategy. This strategy can be based on technical or fundamental analysis (or a combination of both) and can include things like indicators, volumes, etc. You need to have your entry and exit criteria clear before you start dabbling in the markets.
Decide on a risk-reward ratio
The risk-reward ratio refers to the ratio of potential loss to win in a trade. For example, a risk-reward ratio of 2 means you would risk $100 to make $200. For most strategies, a risk-reward ratio of less than or equal to 1 does not make much sense (why would you risk $100 on a trade when you see a profit potential of only $80). This is important because there are opportunities presented in the market which fulfil all the criteria in your strategy, but are not good from a risk-reward perspective, and these trades thus need to be avoided.
Set risk management rules
Controlling your risk is the name of the game. You need to stay alive in the markets to be able to profit. So, experts say not more than 1-2% of your capital should be risked in any one trade. At the most, people say risk 5%, so you have 20 trades to blow all of your money, in the unlikely but possible case that you do have a string of 20 losses.
Journal your trades
It is difficult to remember your mistakes if you don’t have any account of them. And in that case, you’re bound to make the same mistakes again and again. And that’s just stupid. You should keep track of what went right, what went wrong and whatever emotions you feel during an ongoing trade so you can come back and check those notes to be able to improve as you go on.
Maintain discipline
I talked about this in detail here. But nevertheless, you need to have enough discipline to be able to not make impulsive decisions that are almost certain to lead to more and more losses.
Keep learning
The best people in all fields keep improving their skills to be at the top of their game, and it is no different in trading and investing. You need to read books and watch videos with people who have been there and done that so that their success can be emulated.
Hope you got something from this article. Please ask questions if you have any and in the meantime, you can read more from me here. And do let me know if you want a specific topic covered! Subscribe for free to receive new posts and support my work.