You have to have a good stock trading plan, if you want to trade profitably. Such plan defines all actions you will perform with the target to make money with stock trading.
Most traders and active investors think that the best way to make money with equities is to create the best picking strategy and then trade the best picks. But making money on the market is more than just picking the best shares to trade. The profitable plans cover more issues.
When you create a trading plan you should describe several different issues that are related to your stock trading activities. It is something like business plan for any other business. Yes – If you want to make money with shares then you must do all these activities as a business. It can be part time or full time, but stock trading should be done like a business.
What your trading business plan should include
All stock trading plans should cover these basic themes. The description of these areas lays the basic for the ways how you will make money on stock markets.
What is your vision? Why do you want to trade equities?
Example: “I want to create wealth for me and my family to be financially independent. “ or “ I want to create a successful asset management firm and make money also for others”
How do you accomplish your mission statement?
Like “I create a system for my trades producing 20% profit p.a. with smallest drawdown possible”
A thorough self-assessment of your strengths and weakness based upon real trade logs that you collect (if you haven’t done so already).
What are you strengths? And what are your weaknesses?
A thorough assessment of the big picture and the fundamentals that might be behind any trend.
What is your opinion about the global picture of world economy or about your local economy where you live.
Something like: „The US Economy is very indebted. It will be necessary to decrease debt levels otherwise the US dollar will be debased.” or “Economy is very globalized and companies can move from one country to another” or ” Regulation is bad / good for financial markets”
A complete understanding of your beliefs about the market.
What are your beliefs about the stock market? What do you think about stock trading?
Here are some examples: “Stock trading is easy“ or “trading stocks is complicated” or “It is possible to learn to trade stocks profitably”, “technical analysis works” , “fundamental analysis works” .
Write only what is relevant for you. Write as many points as possible as these beliefs will help you to create the best system for traders which will fit your personality.
Your procedures for developing and maintaining discipline.
How do you arrange to your system? How do you check if you are making mistakes or not ? How do you correct your mistakes ?
Financial part of stock trading plans
Your budget and cash flow rules.
It is hard to make a living based on trading with a very small account. If you do not have enough money, make money in some job and return to the exchanges later. The truth is that size does matter for making money on exchanges. The bigger your brokerage account is, the better.
Your worst-case contingency plan.
What happens when Internet is down? How do you close trades? What if your computer is broken, how do you trade? What if you have open trades and your electricity is switched off?
Description of ways you will trade the markets
You should have at least three different systems that you will use for all your trading activities.
System 1—which is compatible with the big picture.
System 2—which is also compatible with the big picture.
System 3—which might come into play should the big picture change.
Market and investors could be in many moods during a year so you should be ready to use different ways to make money. The best plans use minimally three different systems and more trading strategies to achieve their goals.
Do not forget this when writing a trading plan
Stock market is not fixed. Situation change and develops over the time. So you plan should be reviewed and modified if situation changes.
So include regular reviewing schedule into your money making stock trading plans you create.