By Ross B., Branch Manager and Guest Blogger
If you watched the summer Olympics you might have noticed a commercial with a young woman watching on her mobile phone, Team U.S.A. swimmer, Rebecca Soni, set a new 200-meter breaststroke world record. The aspiring swimmer then walks to a whiteboard and writes Soni’s time underneath the word “goal” before she grabs her swim bag and leaves the room. The message was clear: Accomplishing a goal takes a serious commitment.
If you ask successful do-it-yourself traders what it takes to win, they will tell you the same thing. They continually work on trying to improve their trading strategies, consistency, and skills. One of the ways they do this is by creating and following a trading plan. Having a plan can help you stay focused and on track when emotions run high. Here are three things you may want to consider when creating a trading plan:
- Find and Understand Your Trading Style
Rebecca Soni’s coach indicated that she has only two speeds: fast and faster. The coach tried to find ways to get her to slow down and manage her pace a little better, but it never worked. He realized that the training methods he used needed to change to better fit her natural inclinations. This recognition of style is incredibly important for traders. I worked with a group of traders in my past that executed at least 120 trades per year. While many used technical and fundamental analysis to drive their decisions, some were clearly outside of their comfort zone and lacked the ability to trust their planning when they tried a different technique like day trading. So when you put together a trading plan consider aligning your methodology with your trading style. - Define your Entry and Exit Points
I entered into a position one time that I felt would be a winner. Unfortunately, because my emotions blinded me from following my original plan I didn’t exit the position when it fell through a predefined support level. Having a clearly defined entry and exit strategy in your trading plan is important. There are times when you may have to adapt, but never let the motivation driving your trading decisions be personal and not factually based. I overcame my reluctance to close out of losing positions by using stop-on-quote orders. While some traders avoid stop-on-quote orders for fear of how to handle a stock “gapping down,” I found that setting stop-on-quote orders forced me to follow through on my trading plan and minimized my losses. - Identify How to Manage Risk
Another major error I see regularly and have been guilty of myself, is not managing risk properly. While having defined exit and entry points is one a way to manage risk for an individual investment, it’s also wise to manage risk at the portfolio level. I have seen traders who actively use margin fully extend themselves while holding only one investment. Their goal is to use leverage and volatility to ramp up their returns. While this strategy might seem like a winner during good times, it could be impossible to recover from the financial losses in your portfolio when the position moves against you.
Once your plan is in place, all you need to do is stick to it. Remember to review your trading journal on occasion to study what worked and didn’t, and measure your plan’s strategy against the success of other strategies, including more passive strategies like indexing. You may need to make adjustments, but don’t be afraid to adopt an investing or trading strategy that more closely aligns with your situation.
What do you think constitutes a good trading plan?
Also of Interest:
- Why a Trading Journal Can Be Important for Trader
- To Stop or Not Stop: The Pros and Cons of Stop Loss Orders
- Use Support and Resistance to Enhance Your Trading
Ross B. has been with Scottrade since 2006, and is the Cape Coral, Fla. branch manager.