Your Trading Plan Should be your Best Friend

When you have a hunch about a stock or a sharp instinct for a trade, the first step should not be to follow it, but to make a trading plan. A trading plan is a document that traders write beforehand, to establish a guideline for their investments that will best achieve their specific financial goals. A trading plan is essential, as it provides a framework for achieving consistent gains and minimising potential losses. In the heat of emotional moments or feverish technical analysis, your trading plan should keep you in check to stick to your established rules and overall objectives. Particularly for active traders, a trading plan is of utmost importance to minimise risk and maximise gains. Keep in mind that it is imperative to build a habit of sticking with your plan.

Objectives

Determine your overall objectives for your short or long-term trading. Are you looking to buy and sell shares at better prices, protect shares/exposure, generate income, short-term momentum trading or leveraged trading? This should align with your overall financial goals and be achievable considering the amount of time and effort you intend to dedicate to trading. 

For each trade, you should consider your specific objectives. Is your intention to generate income, hedge, trade or gear? Be mindful of the purpose of each trade, and be especially careful when considering which strategies to use in your trading. Use strategies to meet objectives rather than fit strategies to your trade.

Risk Management

Consider your risk tolerance, and how much you would be willing to lose for an investment. Be specific and determine a dollar amount or percentage to portfolio size. 

Think about, “What will I do when strategies go wrong?” now rather than when they go wrong. As each trading strategy has different risks and even the same strategy may vary according to the changes in the underlying dynamics of the market or instruments, determining your stop loss level for each trade is a good practice. Some traders choose to use stop-loss orders which automatically close a trade that reaches a certain loss level; others set prices to trigger for review.