Wednesday, July 26, 2017

Stock Trading Plan – Why You Should Have One

A stock trading plan for your trading is important for the same reasons as a business plan is important for starting a business. You know the old saying, “Those that fail to plan, plan to fail”. As uninspiring and overdone as that statement may sound to us it is extremely important.

A stock trading plan precisely defines your trading and identifies your goals. A good trading plan helps you allocate resources properly, handle unforeseen complications, and make good business decisions.

The importance of a comprehensive, thoughtful trading plan cannot be overemphasized. Much hinges on it: especially the achievement of your goals and objectives.

Despite the critical importance of a trading plan, many traders drag their feet when it comes to preparing a written document. They argue that the market changes too fast for a trading plan to be useful or that they just don’t have enough time. But just as a builder won’t begin construction without a blueprint, eager traders shouldn’t rush into trading without a trading plan.

I’m not saying that you have to write a 500 page literary masterpiece for your stock trading plan. What I am saying is that you should a the very least have a written trading plan. My personal feeling is that if you can’t write down any reasons why you should trade and how you plan to go about it then you shouldn’t trade. This goes for any business at any time.

If you have a hard time putting anything on paper then here is an exercise that I think will help. Let’s say you have a friend and let’s call this friend Joe. If Joe came to you one day and said “I would like for you to invest $30,000 so that I can make you some money trading”.

Would you just give Joe the $30,000 and not ask any questions about how he plans to grow your money? I think not. In this exercise just jot down a list of questions that you would ask Joe so that you could make up your mind about whether or not to give him your $30,000.

A few examples might be:
What is your plan for growing my $30,000?
What kind of return can I expect?
How long will my money be invested?
What are all of the expenses involved?
What are the risks involved?

You get the idea. Now that you have jotted down those questions you would ask Joe, jot down your own personal answers to these questions. Below is a brief example of what you might have jotted down:

What is your plan for growing my $30,000?
I plan to use the XYZ day trading system to trade ABC stock.
I will start out trading X shares per $30,000.
What kind of return can I expect?
I expect to average at least twice the average annual return of the S&P 500.
How long will my money be invested?
I will trade the system for a minimum of 2 years. I will review the system performance and my personal goals at the end of each quarter.

What are all of the expenses involved?
My initial expense will be my starting account capital of $10,000.
Computer Equipment = $X,XXX
Real-time Data Service = $XXX per month.
Commercially Available Stock Trading System = $XXX per month
What are the risks involved?

Make sure that you carefully evaluate the risks versus the reward for your trading method.

Nice start. Now you have the beginnings of a basic trading plan. Add to your trading plan and make it as complete as you can. Refer to your trading plan often to review your goals and objectives

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