Compensated Awareness Post View
Disclaimer
10 Steps To Building A Winning Trading Plan
There is an old saying in business: Fail to plan and you plan to fail. It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, You have two choices: you can either methodically follow a written plan, or fail.
If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success wont come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.
Whether or not you have a plan now, here are some ideas to help with the process.
Disaster Avoidance 101
Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade are not a business plan - it is a recipe for disaster. If you dont follow a written trading plan, you court disaster every time you enter the market, says John Novak, an experienced trader and developer of the T-3 Fibs Protrader Program.
Once a trader knows where the market has the potential to pause or reverse, they must then determine which one it will be and act accordingly. A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the traders skill level improves. Each trader should write their own plan, taking into account personal trading styles and goals. Using someone elses plan does not reflect your trading characteristics. (To learn more, see Fibonacci And The Golden Ratio.)
Building the Perfect Master Plan
What are the components of a good trading plan? Here are 10 essentials that every plan should include:
Skill Assessment
Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.
Mental Preparation
How do you feel? Did you get a good nights sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the markets, it is better to take the day off - otherwise, you risk losing your shirt. This is guaranteed to happen if you are angry, hungover, preoccupied or otherwise distracted from the task at hand. Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone.
Set Risk Level
How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. Better to keep powder dry to fight another day if things arent going your way. (To learn more, see Matching Investing Risk Tolerance To Personality.)
Set Goals
Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly. (For more information, see Calculating Risk And Reward.)
Do Your Homework
Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S
