How to create a stocks trading plan for success in markets ?
“Stock trading is risky”, “Stock trading is gambling”, “Nobody makes money by trading stocks” are some of the common refrains we hear from average people. Why do common people harbor these misconceptions? What makes an average person shun the stock market, when it has been seen that the stock markets do provide the highest returns and have shown to beat the inflation?
The answer – loss of capital in stock trading. Many people have lost massive sums during the stock market crash and so have been scared of entering the stock market.
While people blame the stock markets for their losses, what they fail to ignore is that the loss happened due to the failure on their plan to make a proper plan for their stock trades.
Most people overlook the fact that proper planning is the key to success in the stock market trading. They forget the basic fact, “Fail to plan; plan to fail”. This is what separates successful traders like Rakesh Jhunjunwala from the novices, who continue to burn their fingers in the stock market. A well written trade plan effectively helps us to navigate the stock market turmoils and keeps us on track to achieve our goals.
But a good trading plan requires a lot of introspection. You need to take into account certain things that will make your trade successful. Now what are the things that one should look for when designing a good trading plan? Well here are some of the things that you should incorporate in your trading plan for successful results.
- Set clear, well defined Goals: Not many people know the power of setting clear, precise goals. A well set goal is like a road map that tells you what you want to achieve and by when you want to achieve. A classic example of setting a goal is: Making a profit of Rs 20000 by December 2012. Once you decide on this goal, it is easy for you to make a plan on how to achieve this goal.
- Choose the right equities for trading: Stock exchange has numerous listed stocks that span the different sectors and market caps. But you should remember that not all these stocks will show price movement. Remember that as a trader, you make money on the basis of price movement. So choose the stocks that show a price movement instead of those stocks that show a marginal movement. However don’t select stocks that show a sharp movement, as it can cause losses, if the market is going down.
- Select right entry and exit strategies: A successful trader always buys low and sells high. Your entry should be the price which is the lowest for the stock in the recent past. Your exit should be the highest price for the stock in the recent past. This can be done by carefully studying the charts for various time frames for the particular stock. If the stock is trading above the entry point or below the exit point, be patient, in order to maximize the profits.
- Decide your risk tolerance: Every person has a different risk appetite. You need to understand how much risk you are willing to bear in order to get profit. This can be decided by setting a stop loss. Majority of the novice traders forget to set a stop loss and it is when they burn their fingers, thus suffering loss in the process.
Once you have got all these factors in place, your trading plan is ready. Then you can start executing it and seeing the results. Keep a track of your results and maintain a journal to keep a record of your results. Study this journal regularly and track your performance. Keep on changing your plan periodically in order to get the desired result. Remember, no plan is fool proof. And there is nothing written in the stone, so be flexible with your plan.
About the Author:
Laxmi Kasbekar is a financial planner based in Mumbai. She offers free financial planning services for those who want to achieve their dreams in life. She can be reached for fixing the appointment at firstname.lastname@example.org.