Imagine if you were in charge of a business and your job was to figure out where to invest the firm’s capital where would you start?
Will you go with what you “feel” like makes the most sense or rather rely on data?
You see, some traders out there are just winging it… jumping from one strategy to the next with little regard to money management. These traders are destined to fail, the market will weed them out.
That said, if you are really serious about turning your trading into a profitable venture, then start treating it more like a business.
What’s the first step?
Building a concrete trading plan.
You see, you’re going to need a little bit more than desire and grit to have success in the stock market. You’ll also need a profitable trading system, an active approach to risk management, a set of rules and guidelines to help you stay the course.
Without this stuff…you’re throwing darts at a board blind-folded.
Don’t worry… because after you read this you’ll have the structure needed to go about trading, and things will get less stressful… believe me.
(Trading can be fun and profitable if you take a business-like approach, join my program and I’ll hold your hand throughout the whole process, click here to learn more)
That said, I’d like to walk over with you some of the specifics involved in putting together a trading plan. Remember, this is one of (or if not the most) important step to your trading success.
A lot of people who want to start trading stocks think they can just open up a brokerage account… buy stocks… and automatically make money.
Well, I think that’s the wrong approach.
You see, you’re putting your hard-earned money on the line when you’re trading stocks… and you’re the only one who will protect your capital with extreme care.
Think about it this way, if you were to open a business, you wouldn’t just open it up without planning right?
So why would you start trading without having a clear plan from the start?
Now, if you’re wondering how to start developing a trading plan, I’m going to give you some guidelines to follow.
Developing A Trading Plan
Now, there are two types of trading plans: general and stock specific.
A general trading plan gives you guidelines to plan your trading over the long term. For example, you’re laying out your financial goals, assessing your skill set, and how often you’ll be trading.
On the other hand, with stock specific trading plans… it’s what you write down before you enter a trade (which we’ll go over after we lay out some details to include in your general trading plan)
One of the first things you should do if you want to start trading is assess your finances and goals.
Of course, you’re going to need money trade. So you need to answer these questions first:
- How much capital do you have to trade?
- How much of your capital is in retirement accounts?
- How much of your capital is in cash or margin accounts?
You see, the amount of capital you have and the type of accounts you’ll trade can impact the style of trading you choose.
For instance, because of the Pattern Day Trader (PDT) rule, a day trader must have a minimum of $25,000 available to trade a margin account… so if you don’t have $25K to trade with, you’re going to have to limit your day trading and start looking for swing trades.
Now, if you need to live off the returns you produce, do you have enough capital to not only produce enough income to cover all your expenses, and have enough to save?
Also, will you be able to allow the account to continue to grow so that you can maintain and, or improve your style of living for the long-term?
Once you know where you stand from a financial standpoint and decide you want to start trading… you should set some financial goals.
When you have goals, it actually allows you to remain disciplined and keep your eye on the prize. Now, some answers to questions that you should include in your trading plan include:
- What is your ultimate goal (e.g., financial freedom or independence)?
- What amount of capital would you need in order to feel you’d reached your ultimate goal (for example, $2M or more)?
- What is your timeline for reaching your ultimate goal?
That said, once you’ve figured out your long-term goals… it’s time to assess your skills
- How proficient are you with the use of your computer or mobile devices?
- Are you able to learn new software programs quickly and easily? If not, are you willing to do the work required to learn your charting and broker platforms? You’re going to need to know how to use your trading platform – whether it is a desktop or a mobile app.
- Are you familiar with basic mathematical concepts and statistics? If not, are you open to learning those basic concepts?
- Do you have any market-related knowledge? For example, do you know what makes stocks move or chart patterns are? If not, that’s okay… you just have to be willing to learn about these so you can develop a trading system.
Once you’ve answered all these questions, you have to figure out which brokerage and trading platform fits your wants and needs. For starters, you can check out TD Ameritrade, E*Trade, Charles Schwab, or Interactive Brokers. Make sure you understand the fees involved and test out the trading platform before you select one.
The next thing you’ll need to know is how to develop trading plans for the stocks you’re trading. Now, if you don’t know any chart patterns or strategies… that’s okay, I’m going to share one of my favorite setups with you… the rounded bottom breakout (RBB).
Make Sure You Planned Your Trade Before You Enter
This pattern mainly involves price action and technicals. Now, I actually have a 8-step checklist that I use to find these patterns… you can learn more about the setup here.
Basically, I’m looking for downtrending price action… with moving averages confirming the downtrend. Thereafter, I’m looking for the stock to trade in a small range.
Once the stock starts rising, I keep a close eye on it… and watch to see if the shorter term moving averages cross above the longer term moving averages. When you see that, it’s a bullish signal.
Thereafter, I’m looking for a breakout with the stock closing above the 50-day simple moving average (SMA).
For example, here’s a RBB setup I’m currently watching:
Basically, I looked at the check list… and Newell Brands (NWL) nearly hit all of them.
If you want to create a plan for your trades… there are a few key pieces of information to include, such as your thesis, entry price, stop loss price, and target price.
So for NWL, your trading plan would look something like this:
Thesis: NWL is setting up for the rounded bottom breakout pattern. If the stock closes above the 50-day SMA, and the moving averages confirm the breakout… I’ll look to get in the stock.
I’m not going to get into the stock unless I see the stock confirm a bullish direction.
Entry: Anywhere between $15.75 – $15.90 (if and only if the price closes above the 50-day SMA with the 8-day exponential moving average (EMA) above the 20-day SMA… as well as the 20-day SMA above the 50-day SMA).
Now, if you need a refresher on moving averages, click here to learn more.
Stop loss: 2% below my entry price.
Target: First target at $17, second target at $18.50 (the 200-day SMA).
When you have a plan for your trade… all you have to do is trade the plan and stick to it… once you do that, it should increase your chances of success. Now, if you need more trading tips and tricks, check out my 10 Must-Have Trading Tips.