Entering the stock market can be daunting and new traders are often advised to have a trading plan. An oft-repeated saying is that ninety percent of all stock traders fail and the remaining ten percent all have trading plans. It’s not exactly provable but this should show you how highly regarded trading plans are. A good trading plan can help you through the rough spots when you’re trading on the stock market and this means you should try your best to formulate a good one and to stick to it consistently.
So how do we formulate this almighty trading plan then? Well, you should start by assessing yourself. This is simple because a trading plan is more than just any vague idea of how you should behave in the market – it’s pretty much a program of how you will behave in the market. There’s a very thin difference but that difference can mean the loss of thousand of your dollars or you hitting the mother lode. Knowing exactly what you can do and what your mental state is imperative. A trading plan sets the risk level that you want to go and it can be nerve-shattering sometimes when you see a deal that your trading plan won’t let you take. Knowing how you will respond and how fast you can respond to the sudden changes in the stock market is important. This will determine how you should shape your trading plan. If your personality is that of a natural risk-taker and you have the deep pockets to back this up in the market, your trading plan should reflect this.However, if you have a more conservative outlook and don’t have much money, a less daredevil trading plan would probably be more appropriate
Another thing that a trading plan should contain is your short-term and long-term goals. I mean, what is the profit target that you’re aiming for? How high a risk-to-reward ratio are you willing to go? Having a set profit target for your trading plan is a very good idea and would help keep you on track. Doing it in weekly, monthly, and yearly increments also provide you with a simple way to determine your performance.
You should also set up some rules for how you get in and into the market. This is pretty simple, actually: you just set a target number when you start buying and another target number, whether in stocks or profit or loss, when you start getting out of it. This is pretty important. The difference of a dollar when you’re dealing in thousands of shares can mean riches or ruin. Be sure to strictly to follow the rules that you make for yourself.
Next, regularly update yourself on what’s happening in the market. Doing market research is a great way to make sure that you don’t get caught with your pants down. Knowing which markets and products are gaining or losing ground will definitely help you avoid any unnecessary risks when you are trading stocks. It also defines your strategy for any upcoming trading day.
However, all of this formulation is of no use, if you won’t stick to your trading plan. Remember that a defined trading plan is just a set of instructions and it is still up to you for you to implement it. A good trading plan reflects what you are comfortable with and hopefully a way for you to profit.