Stock trading investment strategies

Chapter

Plan Your Trading and Trade as per your Planning

I believe trading is a business and hence I strongly recommend a prospective trader to treat his trading as if he is starting a new business. For any new business, a business plan is very valuable. The same is true for a trader. A business and trading both have considerable similarities. In a conventional business, we sell things at prices higher than what we have paid for them. The same objective is there in trading- buy low and sell high. Trading and business both require capital and are carried out with one objective- to earn profit. Success in both greatly depends on our ability to buy and sell smartly- buy as cheap as possible and sell as expensive as possible. However it is not difficult to see many businesses lose money or fail over time. Similarly, some traders lose money in trading and are forced to quit trading.

Every business has considerable risk and hence a business plan is helpful in planning for the future. Every business plan has some stated objectives and it contains strategy about how to reach there. A business plan acts as a guide for its owner and keeps him focused on achieving his goals. The same can be said about a trading plan. It can help a trader formulate his goals and develop a strategy to reach there. Once in place, it acts as a guide to keep efforts focused and as a control to keep one's behavior in check. As there is no one-plan-works-for-all business plan, there is no one-size-fits-all trading plan. What is good for one person may not work well for others! As no two people have exact similar circumstances, constraints or preferences, there is no ready-to-use trading plan that I can offer to you all in this book. Every trader will need to create his trading plan by himself, and to provide some guideline, I will write about what I think should be included in a typical trading plan.

How do most people get into trading world? As most people usually don't bother to create a trading plan, let us think for a moment what brings them into stock trading. As I know, most people start trading without putting any serious thought into it. Quite often, an individual hears a friend or a stranger talking about some impressive profit in some trade. This acts as a temptation for him to trade stocks for seemingly easy money. First, he starts by watching a few stocks, say around 6-8, but as time passes, his list gets narrower as stocks that are not doing well get dropped from his watch list. So after some time, he forgets about the stocks that were on his watch list but did not do well, and he keeps focusing only on those 2-3 stocks that are doing well. This fills him up with false confidence that he has exceptional stock-picking skills. At this point, he genuinely believes that he has skill-set necessary for success in trading and now he doesn't want to waste any time. He makes his first trade. It may be just a coincidence or there may be a lot of research behind it, but his first trade is more likely to be in profit than in a loss! Maybe that is a hidden law of Capitalism to bring more and more people into trading so as to keep the cycle of wealth rotation running smoothly! After the first trade, there is no looking back! Before one even realizes it, he is hooked up. He is addicted to stock trading! As there is no formal trading plan, in the end, most traders fall in known trading traps: small profit-big loss, taking positions against the trend and ignoring use of stop-loss. Hence I recommend that every trader create a trading plan before he enters trading.

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Best Stock Trading Book