It is truly amazing to see how many folks out there who dive right into the stock market today and do not even give a thought to having stock trading plans in their investing arsenal. The honest to God’s truth – it is like driving your car without brakes or a seat belt.
Why do you need a trading plan? The answer is simple. You need to know what to do when adversity strikes your well-earned stock positions during stock market hours. Your plan points you in the right direction whenever the market goes south and, believe it or not, whenever it soars. Either condition will flood your mind with emotion which is not desirable when investing in stocks.
So what exactly needs to be address in stock trading plans anyway? I am glad you asked, let us discuss that right now.
Address Stock Selection
Probably the most obvious issue that your investing plan should consider is how you will select stocks for purchase. And the type of stocks you are seeking will depend on your strategy, so your strategy needs to be included.
Many investors like to keep their strategy in their heads. This is not the best idea because when you put it down on paper, then there is a bigger commitment on your part. Don’t believe me? Try it and see.
This really shouldn’t be that hard – if it is, then maybe you shouldn’t being investing your money in stocks until you know your trading objectives. The key here is to be specific as you can. You want to spell out exactly the kinds of stocks you are looking for.
Address Money Management
This is easily the most important part of stock trading plans. Basically, there are three things that should be a part of any stock capital money management approach. You must define first how many stocks you will hold at any one time. After that, you need to figure how much maximum risk you will subject to your investment account at any given time. Finally, you must determine how much you will risk on each stock position.
From these three pieces of information, you can easily calculate where your stop losses need to be and how much you can afford to invest in any given stock. DO NOT ever put all your investing capital into one stock – you need diversity to protect your account.
Address When to Sell Your Stocks
Obviously, when you sell a stock, you are either taking a profit or taking a loss. It is so important to spell out ahead of time the conditions that will define either scenario.
You cut your losses when the stock investment totally tanks and your only objective is to keep your average dollars lost per losing trade as low as possible. On the other hand, you want to keep average dollars gained per winning trade as high as possible. Doing these two things is what determines if you are a winning stock investor or not – it’s that simple.
Conclusion
When you create stock trading plans, you must approach them the same way that our government handles our laws. We must abide by the old law until a new modification is written and approved. The same can be said about your trading plan – do not ever change them during market hours, only modify them after the stock market has closed.