Building a solid stock trading plan is one of the most important things you can do before you actually start trading. This isn't something you can impulsively jump into and expect to achieve success. A solid plan can help guide you. It can help you make difficult choices, help you make decisions quickly when needed and it can help keep you grounded so you don't start gambling instead of trading. This may not sound like an exciting part of the process, but it is a vital one if you want to find greater success. Fortunately there are some tools to help you create the right plan for you.
Research
In this case I'm not referring to research of companies or specific stocks. I'm referring to different styles, strategies and other aspects that will impact the way you trade.
While the term research may not sound very fun, this can be a really fascinating part of the process of developing your stock trading plan. Read about areas that influence how and why people trade. This should include reading about risk management, money management, market psychology and technical analysis. Start with entry-level books and see if a particular area interests you. Once you gain some insight on a variety of areas you can fine tune particular interests and start developing a plan that will fit your own personal style, budget and interests. Whether numbers and ratios or human behavior are your core interest you can use what you learn about these aspects to your advantage.
Back Testing
As you are building your plan you can use back testing to fine tune it. You can change and adjust the contents like the amount of risk you are willing to take on any trade, or the go and no go points. This is a good time to experiment with different parts of your plan to see how they hold up in the market.
To get the most use out of back testing try not to add too many factors. Stick with three or less or you may not make the best use of this tool as you may end up finding results that will never come true in real life.
Practice Trading
Practice trading allows you to practice your trading plan to see how it performs without actually investing any money. Keep in mind you want to make note of everything when practice trading. Track all the fees as well as any gains or loses so you get a true picture of how you would do if you were investing real money. You may also want to follow stocks you decided not to pick for your practice trades to see how they perform as well.
Experiment now and use this time to refine your trading plan. You want to be confident about your trading plan before you actually start executing real trades.
Building a strong stock trading plan can help you stay on course and make difficult decisions when needed to help you achieve greater success.
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