In business, there is an ancient adage that goes something like this: if you don’t plan, you plan to fail. Even though it may seem to be flippant, individuals who are serious about achieving success, even traders, should treat those words as if they were engraved in stone. Ask any successful trader who consistently generates money, and they will most likely tell you that you have two options: Either you follow a documented strategy meticulously or you fail.
If you already have a formal trading or investing strategy, you are in the minority, and you should be proud of yourself. A successful strategy or technique in the financial markets is the result of a lot of time, effort, and study on one’s part. While there are no certainties in life, by developing a clear trading strategy, you have removed one significant stumbling obstacle off your path to success.
If your strategy is based on defective approaches or a lack of preparation, your success will be delayed, but at the very least you will be in a position to outline and adjust your path of action. It is only by recording the process that you will learn what works and how to avoid the expensive errors that beginner traders are prone to making. Whether or not you have a strategy in place at the moment, here are some suggestions to aid you in the process.
Disaster Prevention.
Because trading is a business, it is essential that you handle it as such if you want to be successful. Reading a few books, buying a charting software, creating a brokerage account, and immediately beginning to trade with real money is not a business strategy; rather, it is a formula for catastrophe, according to the experts.
A strategy should be created with unambiguous signals that are not susceptible to alter while you are trading, but that are subject to reevaluation after the markets have closed on the day in question. The strategy may alter in response to market circumstances, and revisions may be necessary as the trader’s skill level increases. Each trader should develop his or her own trading strategy, taking into consideration their individual trading styles and objectives. Using a trading strategy developed by someone else does not represent your trading traits.
The Art of Constructing the Perfect Master Plan
Because no two traders are precisely same, no two trading strategies are exactly alike as well. Various essential characteristics, such as trading style and risk tolerance, will be reflected in each strategy. What are the other critical components of a well-executed trading strategy? Here are ten things that any strategy should include:
1. Evaluation of Abilities
Are you prepared to make a trade? Have you put your system through its paces by paper trading it, and are you certain that it will perform as expected in a real trading environment? Are you able to act on your signals without hesitating? Trading the markets is a constant tug-of-war between give and take. The true professionals are well-prepared and take advantage of the rest of the field, which, without a strategy, tends to throw money away after making expensive blunders.
2. Preparation of the Mind
What are your thoughts? Did you receive a good night’s sleep? Do you think you’re up to the task ahead of you? If you are not emotionally and mentally prepared to face the challenges of the market, take the day off; otherwise, you run the danger of losing your shirt. If you are furious, busy, or otherwise distracted from the activity at hand, this is almost certainly going to happen at some point.
Many traders have a market mantra that they say before the day starts to get them in the right frame of mind for the day. Create one that will place you in the trading zone of the market. Furthermore, your trade space should be devoid of any potential distractions. Keep in mind that this is a business, and diversions may be quite expensive.
3. Determine the Level of Risk
What percentage of your whole portfolio should you put at risk in a single trade? This will be determined by your trading style as well as your risk tolerance. Depending on the market, the level of risk might fluctuate, but it should typically range between 1 % and 5 % of your portfolio on any given trading day. That implies that if you lose that much at any time throughout the day, you are out of the market for the rest of the day. Taking a break and returning to the battle the next day is preferable when things aren’t going your way.
4. Establish A Set of Objectives
Make sure your profit objectives and risk/reward ratios are reasonable before entering a transaction. What is the bare minimum in terms of risk and return that you are willing to accept? For many traders, a transaction will not be entered into until the possible reward is at least three times larger than the potential risk. Consider the following example: if your stop loss is set at $1 per share, your profit target should be $3 per share. Prepare a list of weekly, monthly, and yearly profit targets, either in dollars or as a % of your total portfolio value, and review them on a frequent basis.
5. Completing Your Homework
Do you look at the news before the market starts to see what’s going on across the world? Is it better to invest in foreign markets or to avoid them? Are the S&P 500 index futures trading higher or lower in the pre-market? The fact that futures contracts trade at all hours of the day and night makes them an excellent tool for measuring market sentiment before the market opens.
What economic or earnings data is expected to be released, and when is it expected to be released? Create a list on the wall in front of you and determine whether or not you want to trade ahead of a critical report release date. Rather of assuming additional risks connected with trading amid turbulent responses to reports, most traders believe that it is best to wait until the report is out before making a decision. Professional traders make decisions based on probability. They do not engage in gambling. In many cases, trading before of a significant news is a risk, since it is hard to predict how the markets will respond.