Basic RULES to Build a Trading Plan
MUST read Build a Trading Plan
To Build a Trading Plan many people enter the stock market focused only on the profits and do not consider the losses. If you think for one minute you are going to win one hundred percent of the time, you are wrong. Losing is just part of the cost of doing business. Your goal is to make sure you control the risk and not blindly put your money at risk, like a buy and hold investor. You must come to the realization that you will never learn how to win until you first learn how to lose. How you handle loss psychologically is truly the difference between an amateur and a professional. Professional traders don’t react the same way as an amateur to loss. When a professional trader loses, he or she simply says next. They don’t take the loss personally.
Many times you won’t feel quite right about a buy or sell decision. If this feeling persists after you have done all your research and you have followed the rules to this point, don’t take the trade. Too many times individuals try to rationalize a decision. Don’t try to find a good reason for making a bad decision. Your decision must be a confident one.
Build a Trading Plan
To Build a Trading Plan determine the probable dollar losses of your trading plan or investment style based on your trading record for the current year. Then devise a way to generate income through passive sources. Cutting a loss quickly is the best money management you can have. Too many times traders fall in love with stock, holding on as the stock begins to decline. Never use a hedging strategy, such as options, to justify holding on to a losing position. The use of money market, bond, and stock dividend income to offset losses in your trading portfolio is an excellent technique. Covered call options may be an appropriate way to generate income for your portfolio to offset losses. Be careful here because you can write covered calls into oblivion. If the stock is going against you, sell it.
Your probabilities of success are far greater if you stay with a definable market trend. Statistically, these trends provide better profit potential with a lower amount of risk. A good rule of thumb is to watch a 50-day exponential moving average of the close. This moving average represents the intermediate trend of a stock. An 8-period exponential moving average represents short-term trend. The use of these two moving averages should yield excellent results in keeping you in the trend. If you perceive the trend beginning to change, act accordingly by taking profits or placing stops to protect your capital and locking in a profit.
To Build a Trading Plan set objectives before you ever buy. Define all outcomes—not only what you will do when it goes right, but what you will do if you are wrong. Determine the amount of capital you are willing to lose and conversely, define when you will take profits. Letting the market take away your profits by holding on to a losing trade is not a good strategy. Write out a trading plan on paper and follow it. Do not become a causality of emotionally involved buy or selling. Trade with a plan.