Why a Trading Plan Is Essential When Beginning Investing

by David Jenyns on September 25, 2011

If you were starting your own business, you would normally put together a business plan – if you required bank or private finance this would be a requirement – but quite honestly even if it were your money, more especially if it were your money, you should prepare one too. So why do you think it should be any different with the business of trading?
What is the purpose of the plan? Having a trading plan adds another layer of discipline, which is one of the most important aspects of trading. How much money have you lost on a crazy impulse trade for a share which you thought couldn’t possibly go any lower? I would say that the plan is a pre-requisite for trading – if you can’t find the time to sit down and think through how you intend to trade, you really shouldn’t be putting your capital at risk.
What should this trading plan contain? There is really no fixed format. A good plan plays to a trader’s strengths. The trading plan must be custom-built, because every trader has different time horizons, tolerance for risk, and emotional make-up, and the plan must reflect this. The trading system, as set out in your trading plan, should have been back-tested over a reasonable period to ensure that it has a positive expectancy.
In order to give you a head start on the things you should consider including I am happy to share my classification with you, as follows:

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∑ Strategy – which markets and instruments you will trade

∑ Profit Goal – your target

∑ Position Sizing – how much you will buy

∑ Daily Trading Plan

∑ Entries – when and why you will buy

∑ Stop Losses – when will you know that a trade has failed?

∑ Open Positions – how long you will hold a trade

∑ Exits – when and why you will sell

∑ Grading your trades

∑ Emergency Back-up Plans

∑ Record Keeping

This is not meant to be an exhaustive list, but this plan is better than more than 50% of other traders out there, because they don’t have one at all!
Once written, the trading plan need not change very often, if at all. It should be revisited occasionally to ensure its continuing relevance (and to make sure you are still sticking to it!), but it is not a document that drives specific daily or weekly actions – those actions should be set out in your daily or weekly game-plan.

Mick Brooks is an educator, a public speaker, and an avid stock market investor. As a UK-qualified CPA, he thought making money in the stock market would be easy, but his ‘education’ cost him around ,000, so now he makes it his goal to help others to avoid replicating the more obvious mistakes. Visit his website, http://www.beginning-investing.net †for more advice and information, and don’t forget to pick up your FREE copy of the ‘Investing Secrets – Day Trading’ report!

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