Today as the world’s economies start to slow down, many people are searching for how to generate extra income to protect themselves for the upcoming tough times ahead. So what are you doing to help you generate extra income? Many smart traders are turning to the stock markets and forex markets to help them generate extra income. Successful stock market trading begins with a winning trading plan. It’s as simple as that. If you develop a well-conceived trading plan to guide your actions in the stock market you will already have the advantage over most of your market competition. Put simply, it gives you the edge you need to win over the long haul when trading the stock market or forex market.
A stock market trading plan will not guarantee your success in the markets, but a good plan will enable you to work methodically toward your stock market trading goals while reviewing on a regular basis what is working and what is not. It will act as a roadmap for your trading journey. It will enable you to respond positively and constructively no matter what happens with your individual trades. And, most importantly, it will help you control the only thing a trader can control: his or her own actions.
Finally, stock market trading is a business. It can be a fascinating and sometimes thrilling business, but in the end it is a business. A trading plan helps you treat it as a business.
Here are some important elements of a trading plan.
1. Why am I trading ? What are my goals ?
The answers to these questions might seem obvious, but they usually are not. Take some time to ask them of yourself, and seriously consider the answers. You may be surprised by what you learn. And whatever the answers, you will have a clearer picture going forward of what this enterprise means to you, and that will help you survive any rough patches.
2. What markets am I going to trade and why ?
It is often best to specialize, especially for beginning stock market traders. Many pros make a great living trading the same stock day every single day for years. Choose a market that is appropriate for your experience level and trading style. Consider other factors such as available margin, volatility and liquidity.
3. What is the concept or philosophy behind your trading methodology ?
Your trading system must have a concept behind it. Whether you are a value investor like Warren Buffet or a trend trader like George Soros, you should understand why you are doing what you are doing, how your beliefs about the markets define what you will do as a trader.
4. What will be your specific method ?
In other words, specifically how will you execute your trading ideas? Will you buy breakouts or pullbacks? Buy oversold or sell overbought? Or will you use specific technical setups such as moving-average crossovers or another indicator-based strategy ? Under exactly what conditions will you enter? When will you know to exit?
5. How much money will you risk on any single trade ? On trading in general ?
This is critical. Of course, start small. But just as importantly, have a plan in place for how much you will risk, emotions don’t cloud your judgment when the time comes. The key is to find an allocation that doesn’t cause any stress but still makes the trade worthwhile financially. One of the biggest problems with newer traders is that they are trading way too big in relation to their account size. Like when you are forex trading. Trading forex at 100-1 leverage is like introducing your mistress to your wife. Yes, you can do it, but that doesn’t make it a good idea. Normally they don’t get along too well.
6. What will my trading rules be ?
This is also critical. Your trading rules include entry and exit rules, rules governing maximum daily, weekly or monthly losses, maximum risk on any given trade, the maximum number of trades per week, etc., etc. These rules enforce discipline and keep you out of trouble. What stock price will enter at, what stock price will I will exit. Be discplined.
7. How will I record and evaluate my trading performance ?
Allow me to repeat myself: This is critical. In fact, this might be the most important element of trading for new traders in the stock market. A new stock market trader who evaluates his trades, winners and losers, in an effort to learn what works and what does not, will make quantum leaps forward in terms of ability and profitability. If you have a working trading plan and evaluate every single one of your trades after you have closed it you have already beaten 95% of the competition.
8. What are my rules for managing profits ?
What’s the problem with profits? Well, believe it or not there is one, and it’s a serious one. It’s called euphoria, and it clouds the judgment perhaps more than any other emotion related to trading. Start piling up the profits for the first time and it won’t be long before you are convinced you are king of the world. About 30 seconds later you’ll be broke, following a series of unwise and exceedingly risky trades. So have a plan for protecting closed profits when you have reached your goals for the week or the month. Don’t give them all back.
9. How will I reward myself for following my trading plan ?
Don’t leave this out. Following your trading plan will bring rewards in the form of profits, but you should also consciously reward yourself for doing so because it is such an important part of successful trading. So if you finish the week or the month (or even the day) without having broken any of your trading rules, find a way to reward yourself. You deserve it. You are in rare company.
If you follow your plan you are improving your chances of becoming sucessful stock market or forex trader.