March 13, 2022

How To Build A Winning Stock Trading Plan

Table of content

    The goal of any business, including stocks trading, is to make profits. To actualize this, you need to formulate better trading strategies, perform more extensive analysis, and develop a winning mindset. However, one of the most common problems among stock traders is the lack of a proper stock trading plan. They skip the planning phase of trading because they think it is going to be complicated. But, in the real sense, formulating an effective trading plan is easy, especially if you already know what to do.

    For this reason, we have put this article together to enlighten you on how to build a winning stock trading plan. Before we delve into it, let us first explore the concept of having a detailed trading plan in place.

    Why is it essential to have a trading plan?

    Nothing in life comes easily. You need to know what you want and work hard until you achieve it. The same thing applies to stocks trading. If you don’t have a clear trading plan or strategy,  it may be challenging to achieve your desired results.

    Benjamin Franklin once said ‘failing to plan is planning to fail.’  The essence of making plans to succeed makes much sense, but few traders believe in it. However, experienced traders, on the other hand, can relate to the saying and understand that if they want to earn money from trading, they must build a winning trading plan.

    Continue reading this article to understand the overall importance of having a well-detailed trading plan as a stock trader.

    A trading plan is meant to be a roadblock.

    While the idea of failing at stock trading seems like a harsh reality, that is the end game. Diving into stock trading without a clear trading plan is like going for an examination without any prior preparation – you will eventually fail. But only very few traders understand this mystery about stock trading. And even when you encourage some stock traders, especially newbies, of the importance of a trading plan, they often shove it aside.

    The few wise stock traders who realize the importance of a trading plan and draw up a well-defined strategy tend to be the ones with the highest returns. Experienced stock traders understand that a well-defined and detailed trading plan always yields more returns in the long run than not having a plan at all. However, it’s worth knowing that you will earn more if you have a well-detailed trading plan. It is not certain that your trades will always be successful. You win some, and you lose some. But your wins will certainly be more significant than your losses.

    The whole idea of having a detailed trading plan essentially is to serve as a roadblock. A trading plan serves as a roadblock in the sense that it helps keep you in line as a trader and prevents you from making emotional decisions that will make you lose money. Often, many traders have a mindset that they are actually better at trading than they really are. This false superiority mindset can be fatal, especially in a funded traders program.

    Keeping a track record of your progress in stock trading is essential. It will help you avoid making costly trading mistakes and improve your strategic trading ideas. So, if you desire to be successful in stock trading, having a winning trading plan is the best way to go about it. Essentially, all traders should have a trading plan to help them account for personal trading styles and goals. Using someone else’s trading plan may not help you achieve the success you need because it may not possess the trading characteristics you need.

    Here are some ideas that will help you create a winning stock trading plan

    Creating a winning trading plan can be challenging for new traders with little or no experience in trading. When creating a winning stock trading plan, below are some of the few things you should have in mind.

    Avoid disasters 101

    If you want to be a successful trader, you should treat your trading as a legitimate business. Respect it, treat it properly, and stick to the trading plan no matter how difficult it is. By doing so, you will achieve more profit than those who are not disciplined. In summary, to avoid disaster 101, you need to trust the process and stick to the plan.

    To avoid disasters and formulate a proper trading strategy, follow the conventional wisdom listed below

    Read books

    It is advisable that you read books that will help improve your skills as a trader. There are different books you can read about trading. You will learn from the success stories of traders, understand new tricks and strategies, and stay up to date in the market trends. Make reading books a lifestyle; it really helps.

    Open a brokerage account

    Another essential thing to do before creating a trading plan is to open a brokerage account. A brokerage account works like a conventional bank account– you can use your funds whenever and however you want. The difference is that a brokerage account is an investment account that allows you to trade a variety of investments, such as bonds, ETFs, stocks, and mutual funds.

    Buy a chart program

    When creating a proper trading plan, consider buying a chart program. A chart program helps you know the best time to enter and leave the market. Hence, the risk is minimal since you can easily set the entry and exit points.

    Start trading

    Sometimes it takes experience to create the best trading plan. So, after gaining as much understanding as you can about stock trading, try practicing in the open sea. Based on what you encounter as you trade, you can adjust your trading plan.

    While this conventional wisdom sounds like a good trading plan on its own, traders can also use it as a recipe to avoid disaster. At the same time, it may not be this trading plan that will bring you success. The idea of creating a trading plan is to follow a trading strategy that best suits your trading style.

    Always do the following as a trader

    As a trader, there are some practices you should observe when trading or formulating a plan:

    Think outside the box

    If you want to create a winning trading plan, you should think outside the box. In other words, you should explore ideas that are unusual and creative. Think about stock trading in a new and different way from another trader. And it is all right if whatever you come up with is not limited or controlled by orthodox tradition or rules.

    Account for fluctuation in the market

    Another thing you should have at the back of your mind is that the stock market is volatile. For this reason, you must always have room for price fluctuation in your trading plan.

    Study the market for potential pause or reverse

    To properly account for the stock market fluctuation, you must study it. So, take your time to understand how to gauge the potential of a pause or reverse in any stock.

    Act based on those principles

    Lastly, whatever verdict you come up with on how to trade, ensure you act based on it. Sticking to these principles is what will help you trade like a pro.

    Before you start trading with a funded trading program

    Trading with a funded trading program is way different. When trading with a funded trading program, the stakes are much higher, and your trading decisions must be more accurate and precise. Flopping with a funded trading program can lead to the loss of funds. As such, before you start trading stock with a funded trading program, here are a few things you should consider:

    Have a solid trading plan

    Before you start trading at the open sea, you need to have a solid trading plan in place. If you are not convinced your trading plan is solid, try to develop it before trading stock with a funded trading program.

    Account for a re-evaluation

    Even when you are sure you have a winning trading plan, you should still leave room for a re-evaluation. After the market closes, you may need to re-evaluate your trading plan to ensure it is still solid. Perhaps there may have been some changes or new information that may require you to adjust your trading plan.

    Your trading plan should be flexible.

    Nothing is written in stone when creating a trading plan, meaning nothing is permanent. Your trading plan should be flexible because the stock market fluctuates, and you should adjust your trading plan based on the market condition.

    Adjust your strategy with experience

    Essentially, as you start trading with a funded trading program and start gaining experience, you need to adjust your strategy. The more you trade, the more your skill level increases, so always leave room for adjustments.

    How to build the perfect stock trading plan?

    When it comes to building the perfect stock trading plan, some things are expected of you. Often, many beginner stock traders don’t know what to do or where to begin. If you are a beginner stock trader or you’re simply looking for a way to improve building the perfect trading plan, then you should follow the steps below.

    Do your homework

    The first thing you ought to do before you start trading is your homework. The importance of researching before you start trading is that it helps you overcome common mistakes many traders make. So, before the market opens, begin your homework. While doing your homework, be informed and vigilant about what is happening in other markets. Take note if other markets around the world are up or down.

    When doing your homework, the key to gauging the market’s mood before it opens is to keep checking on how the index futures are performing. Also, check on when the economic data or earnings come out and create a list. It helps to keep this list close to you, especially if you want to trade before a critical report. However, it is more advisable to wait for a full report to be released. Lastly, remember that professional traders place trades based on probabilities and not gamble on trades.

    Skill assessment

    As you build the perfect trading plan, have a good idea of your trading skills. Assess yourself and determine your strengths and weaknesses. To assess your skills, answer the following questions:

    • Do you feel confident in your understanding of the stock market?
    • Do you have any trading experience?
    • Are you able to make any trading decision without hesitation?
    • Are you ready to test yourself in the stock market?

    If your answer to these questions is “yes,” you are on the right path. However, even though you feel confident in your skills, remember that even professionals sometimes find it tough to predict the market. If you are trading, have the mindset of a give and take.

    Set risk level

    No business is without risk, including stock trading. Arguably, stock trading may be riskier than other types of business. However, when creating a trading plan, you can set the level of risk you want to bear. To do this by determining your trading style and risk tolerance. On a typical trading day, your risk tolerance level may be between 1% – 5% of your portfolio.

    However, it is crucial that you stay disciplined, especially when you reach your set risk level. Don’t let your emotions lead you to make vital decisions when a trade is live. It is always better to call it a day and stay afresh the next day rather than being stubborn and keep trading.

    Mental preparation

    When it comes to trading stock, there are many mental challenges involved. As such, you must be mentally prepared to handle it; if not, things can get quite overwhelming within a short time. To prepare yourself mentally, you should not overlook the importance of a good night’s sleep. Simply because you are trying to study the market more, that doesn’t mean you shouldn’t rest.

    Although it is good to study the market, being mentally drained can affect your physiological and emotional readiness to take on the next day’s trade. Consequently, if you ever feel mentally exhausted, it is important to take a day off to rest and get back in the right headspace. Distraction, anger, pre-occupation does not bring good results. You should also ensure no distractions are close to where you sit and trade.

    Trading preparations

    Before you begin to trade, label the following adequately:

    Minor or major support

    The minor support helps to temporarily delay the rise and fall of prices within larger market trends. At the same time, major support stops the rise and fall of prices within larger market trends. It is always important to figure this out before you start trading.

    Resistance levels

    It would be best to label the resistance levels as it tells you the price point on the chart where you can expect maximum supply for the stock. The resistance level is often on top of the current market price.

    Exit signals

    The exit signal is a vital part of stock trading that traders should always be particular about. The exit signal, also known as a sell signal, is a measurable level or condition that alerts traders when to sell a specific stock.

    Alerts for entry

    Like traders need to know when you exit a trade, the same applies to entering a trade. The alert for entry signals traders to know the best time to enter a trade or buy a particular stock.

    Set goals

    A perfect trading plan should have a set of goals you want to achieve. But when setting these goals you want to achieve, it should be realistic. Your goals should be realistic in the sense that your risk/reward ratios and profit target should be something achievable. Similarly, the goals ought to be as straightforward as possible.

    Similarly, you should set weekly, monthly, and annual profit goals to help you keep you on the right path always. Also, from time to time, reassess your goals to keep you always prepared for what you have to achieve. For example, some traders will only trade on a stock when the potential profit is about three times more than its risk. Such a trading goal is achievable and clear.

    Keep excellent records

    All stocks trading portfolios are usually well organized and help keep excellent records of all trades, including winning and losing ones. This provides them with a reference point they can use for future trades. It will also let them know what they did right and where they got it wrong. Some vital details you should write down include:

    • Trade target
    • Entry and exit levels
    • Time
    • Demand and supply levels
    • Daily market opening range
    • Open and closing of the market for the day
    • Records with a comment about why you made a trade
    • Frequently reviewed trading records

    Set exit rules

    Many stock traders don’t know the best time to leave the market. They are often more focused on buying a signal because they do not want to sell when the price is down, which would mean taking a loss. Hence, it is vital to have a solid plan to exit a trade.

    Below are some tips on setting the perfect exit rules:

    • Learn how to get over losses incurred
    • Don’t be overly emotional and out your trades
    • When you sustain a loss, don’t take it personally
    • Understand that everyone experiences some good days and some bad days. The key to being successful is to limit losses and manage money cleverly.

    Set entry rules

    Traders ought to set conditions for entering the market and ensure the time they enter the market is right. However, some traders place very little attention to entry rules. They assume that exits are more important. This is not true– you should understand that there is the best time to enter a market likewise to exit it.

    Knowing the right time to enter is why computers are better at trading than humans. People then let their emotions get in their way when trading. Whereas computers look for conditions in the market, and when met, they will enter. The best way to set entry levels is to:

    • Have clear rules for entering the market
    • Controlling your emotions when you lose or feel invisible when you win
    • Base all your trading decisions on probabilities

    Perform a post-mortem

    After every trading day, you should perform a post-mortem. A post-mortem is more like analyzing everything you did right that gave you a profit and the wrong decisions that made you lose money.

    Below is a snippet of how to perform a post-mortem:

    • Add up losses and profit for the day
    • Understand what happened during your trades
    • Write a conclusion in a journal from that day’s trade

    Stock trading plan – the bottom line

    Simply because you have devised a winning trading plan does not guarantee success. Nevertheless, you may have a lucky phase, and when you do, it’s in your best interest not to let that get to your head by sticking to what you think works for you.

    Confidence is the key to success in stock trading and re-evaluating every trade! Practicing this regularly will help you develop enough skills to no longer doubt or second guess your trading decision.

    Remember that winning does not come without some loss in trading, and it is advisable that you enter a trade with a favorable odd. Do everything possible to cut down your losses and let your profit ride. You should trust the process and never stop following your trading plans. So, don’t give up. You will attain the greatness you desire.

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