Learn how to approach your trading like a business with these five essential components.
As Benjamin Franklin wisely said in the 1700s, “By failing to prepare, you are preparing to fail.”
Fast-forward to 2021 and apply this to your trading or investing approach. How much have you prepared?
Any small business owner knows a business plan is essential. No bank is likely to give you a loan without a business plan. The goal of trading is to potentially grow your wealth, similar to that of a small business investment. So, if you haven’t taken the time to write a trading plan, carve out some time this weekend. By the way, this is something you can share with your partner.
(Hint: Good communication with your significant other about trading plans can help keep everyone on board with the approach, desired goals, and time investment needed for successful trading.)
Set specific financial goals. Write down your specific objectives, but try to dig deeper than simply “saving for retirement.” This could be a dollar amount within a specific time frame. For example maybe you want to make a profit of $1,000 a month from your trading. Or it could be a specific percentage gain you want to see in your portfolio within a specific time period. The financial decisions you make should align with your objectives.
Determine your buy criteria. This could take weeks or months to refine and could evolve over time as market environments change. Spend time studying, learning, and developing an approach that works for you. Do you buy stocks based on fundamental or technical analysis, or a little of both? Are you a fundamental stock picker, but like to use charts to fine-tune entry points?
Know when to sell. One of the cardinal rules of successful trading is knowing where to exit before getting in to a trade. If the market starts moving against you, you should be prepared to take your losses and exit your position. So, it’s important to plan your exits. If you’re a technical trader, you could use potential resistance levels from long-term charts (think weekly or monthly) or chart pattern targets such as a break in a head and shoulders neckline. Make a plan for exiting profitable and losing trades, write it down, and automate an exit point. You could include the following:
Stop market orders do not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
Identify your trading or investing time frame. Determine your trading time frame. Are you a short-term swing trader, looking for two- to three-day opportunities, or do you want to hold positions for multi-month moves? Maybe you do both, i.e., have some longer-term investments and some that are shorter term. Write it down.
Develop a risk management plan. Trading is about taking risks, so it goes without saying that risk management is very important to successful trading and investing. Consider setting specific risk parameters that you’re comfortable with, such as when to protect your capital, when to take profits, and the size of your positions. Remember: You’re operating in an uncertain environment, which means you’re likely to have losses. The key is to minimize those losses, and that means you should be ready to take action when necessary. There are different ways to manage risk. Here are a few examples.
When it comes to trading, hard work can pay off. What’s work when it comes to trading? Keeping a trading journal and reviewing trades on a weekly or monthly basis can be helpful. Write down the five essential components of a trading plan and compare your trades against them. What went right? What went wrong? Did you risk too much? Are you following your trading plan, or did emotional trading take over? A review process can help keep you accountable and allow for adjustments as needed to help you pursue your goals and approach trading like a business.
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