Trading Plan: They are Important

Plan to succeed

When we first talk to subscribers who are beginning the journey of equities, or share investment, share trading, CFD trading. Forex or Indices trading, one of the common conversation threads is about the importance of a trading plan.

A trading plan is something that we feel is absolutely essential, but not something that everybody has considered before committing to placing their hard-earned money in the stock or derivatives' markets.

Why is a share trading plan so important?

One of the more well-known business clichés is: ‘fail to plan, plan to fail’. Such adages like that do not come about by accident; rather from the hard lessons that others have leant. You would be wise to consider that there is some truth in it. A share trading plan should be designed to increase your chances of share trading successfully in the long-term by taking the emotion out of investment so that the decisions you make are based upon analysis available at that time. We often say that the market is about psychology, therefore the use of a share trading plan that is tailored to your objectives and trading or investing style will increase the profits you make.

What do you need to construct a trading plan?

Whilst deciding what your share trading plan should contain you need to consider what you are trying to achieve, at the minimum you should be able to;

• Decide what your objectives and risk profile are. This will allow you to create a trading portfolio that reflects your goals and the level of risk you feel comfortable with.
• Construct a balanced portfolio covering Forex, CFDs and Indices.
• Decide how much of your capital to invest in the various markets / portfolios. Remember, never put all your eggs in one basket.
• Create entry and exit criteria that you can live with!

Creating a plan

Once you are able to write down your criteria you can start fleshing the plan out. With regard to stock selection you may decide to make firm rules for the criteria a share must fulfill before it becomes part of your portfolio. For example;

• Whether it has to have a certain market capitalisation,
• The level of leverage dictates the stop levels. Forex and Indices hold a higher level of leverage than CFD share trading, suggesting shorter time frames and controlled exit points.
• Do you require a certain minimum Profit/earnings ratio threshold?

Trading Plans Avoid Emotion

When you have decided that the derivative (Forex, CFD Shares or Index trade) is something that you wish to hold within your trading portfolio then you must decide the entry point, that is the price you are willing to pay. Remember not to get carried away by chasing a price too high as that would be emotion taking hold!

Your exit criteria should also be decided at this point, especially the loss level that you would sell the trading derivative. These stop losses preserve your capital and allow you to exit a losing trade and find an alternative trade idea that will increase in value.

Finally, you will need to be disciplined in keeping records of all your trades. Only by reviewing your trading plans performance are you able to tweak the plan to best suit your needs.