How To Design A Successful Trading and Investing Plan
It is quite surprising just how many investors attempt to trade the financial markets without a trading plan. Such a blind pursuit of profits will most certainly result in lost capital. The problem is that trading can be an emotional endeavor. The old saying, “bears and bulls make money in the markets, while pigs and sheep get slaughtered”, even implies the emotions of trading. Pigs are depicted as greedy and blindly rushing ahead, while sheep are feeble and afraid of losing their money – but both lose in the end.
Proper capitalization. Traders entering the markets without proper trading capital is a very common mistake. Why? Because they don’t expect to lose, they’ve gotten that hot tip, a sure winner. Their trading account blows up after a few trades. Most have no clue exactly how many consecutive losses their trading system will generate on average.
Trade Objectives. Another common problem with new traders is they have no goals. At what point will profits be taken? Will you sell off part of the position and let the remaining run for maximum profits? These decisions must be made in advance and not in the heat of battle.
Money Management. Every plan must address money management. When the trading account is gone, the game is over. Protecting the trading capital has to be the number one objective. Thorough trading plans need to define every level of risk. It should address the risk level of every trade, and the risk level of the entire account. These levels must never be exceeded under any circumstances. The plan should also identify the maximum number of trades or positions to be undertaken at any one time.
Handling Losses. Trading plans need to be aware of what probabilities of winning and losing are. They need to address how many consecutive losses could be experienced using the trading system. If this information is not available, then the trading system should not be used.
Handling Profits. Trading plans also need to address how to handle capital expansion. As profits roll in, will the trader adjust the number of positions? Will some profits roll into safer, less volatile investments? Will some profits be withdrawn?
Trading should not be attempted until a sufficient trading plan is drafted with a minimum of the elements mentioned above.