Stock trading plan
What is Stock Trading Plan?
Stock Trading Action Plan is a set of instructions to yourself, to take action, right from the first order that you place to enter a trade, to the last order which you place to book profit (or loss).
Writing a business plan is the professional way of approaching a trade. Although Trading Plan does not guarantee your success, It will make the management of trades easier, especially when the market makes wild swings to alter emotions.
This is the first step you take before you start placing your order with your broker. Traders should have separate trading plans for different types of plan.
Whether it is a day trading plan, swing trading plan or a futures trading plan, it should be based on your own technical or fundamental research. Your trading plan should be tailor made to suit your personality, ability and resources.
What a good stock trading plan should include?
A good stock trading plan should be able to answer the following questions.
- Which stock to trade?
based on fundamental or technical analysis
- Whether to go long or short?
based on trend analysis
- How many shares (or lots) to trade
based on money management
- At what price to enter the trade?
based on support and resistance analysis
- At what price to exit the trade with loss if it goes against you?
based on risk analysis
- What is the maximum loss you incur if it becomes a loss trade?
based on the risk to reward ratio
- How to protect the profit with trailing stop loss?
based on the trailing stop loss rules
- At what price to exit with profit?
based on target analysis
- After how many days to close the trade if movement becomes slow?
based on time analysis
- What time frame do you trade?
based on your mental make up
To create this you have to analyse the market, analyse the stock and apply the money management rules.
What are the benefits of a stock trading plan?
- Trading plan is a road map, with which you move through the jungle of stock trading and reach from where ever you are to a place where you become a consistently profitable successful stock trader.
- It helps you maintain a calm mental attitude, which prevents you from taking idiotic actions. Decision during the trade can be irrational leading to bad trades. Any action you plan before entering the trade will be of a better quality than when you are in the middle of a trade.
- Trading plan makes you a disciplined trader. All successful traders are disciplined. But gamblers are neither disciplined nor have a plan of action.
- If you learn just one thing, that is booking losses early and allowing profits to run, your loosing trading career turns into profiting trading career. Trading plan prevents you from booking profit early and allowing losses to run.
- With trading plan you will have the ability to monitor your trading. You will know what is working for you and what is not working for you. If something goes wrong you will easily make out what went wrong and where it went wrong.
- Trading plan helps make your trading, a relaxed, stress free, enjoyable activity. It helps to manage the most important component of the trading – that is YOU.
- Methodically written trading plan makes the difference between a winning trader and a loosing trader, any trader's bottom line.
Cultivate the habit to stick to your plan what may come. Even if your best friend who is a very successful trader, advices you to do contrary to your plan, do not listen to him.
Plan your trade and trade to your plan.
If you fail to plan, You plan to fail.
After you create your 'Trading Action Plan', based on your own technical or fundamental research, next step you are going to take is, placing your order with your broker. Before you can start buying and selling stocks, you must know the different types of orders. You must be aware as to which order is appropriate and its implications.
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