By Juhi Kastiya
“95% of all traders fail,” is probably the most common saying that goes around for trading, along with the misconception that its a way to earn quick money. One should be able to tell how this misconception along with inadequate planning only fuels this statistic. Correct and rational planning is essentially what gets a trader to the alleged “5%” that win with trading.
Active trading is the buying and selling of securities in the short term, it requires two key components: a trading plan and a trading strategy. While ‘strategy’ and ‘plan’ are generally used as synonyms, here a trading strategy dictates your entry and exits points for the trade and everything else such as your risk management, execution and more come under the trading plan.
Steps on making a trading plan
1. Set clear goals and realistic expectations:
One must clearly define their reasons for investing, what sort of goals or financial objectives they want to achieve with it, understand the risks involved, identifying what your risk appetite might be and clear misconceptions before they start trading. Without this set in place, the investor is more likely to react irrationally, act on emotional impulses and set unreasonably high expectations to compete with.
2. Select a trading style
The four most common trading strategies are: scalping, day trading, swing trading and position trading. Scalping is essentially a trading style However positions trading is often just considered an investment due to its long term nature (months-years).
3. Develop a trading strategy
Most trading strategies either rely on technical and/or fundamental analysis in order to select securities, both of which use quantifiable data. The entry point of the trade is determined here. Technical analysis involves studying the price’s movements and patterns to predict its future position; it assumes that all the other factors are reflected in the price of the security.
Common examples of technical analysis’s applications are simple moving averages, momentum indicators, and trendlines.
On the other hand, fundamental analysis focuses on determining the intrinsic value of the security and comparing it with the price to see whether the security is undervalued or overvalued. When the stock is undervalued, it is recommended as a ‘buy’ and overvalued as a ‘sell’. It takes into consideration both systemic and idiosyncratic factors that impact security, going from the state of the economy, to the industry and to the specific company. Hence this uses both qualitative and quantitative data, note that the use of qualitative data makes it subjective between investors.
4. Entry and Exit strategies
The entry is decided based on the trading strategy used. The holding period of your security depends on your trading style, be it minutes for a scalper or weeks for a swing trader. The exit strategy of trade is advised to be as simple as possible, the more variables one adds, the more likely they are to keep deviating from their plans. These strategies can be based on: parameters and variables, time, stop loss and target.
5. Conduct thorough market analysis
The overall market conditions and trends need to be monitored in order to identify more trade opportunities and to keep up with what’s happening in relation to your current investments.
6. Develop rules for risk management
Throughout your trades, experiencing some losses are inevitable, but they can be minimised. Risk management is the process of identifying, analysing and finding ways to mitigate uncertainty. Some risk management techniques are avoidance, retention, sharing, transferring, loss prevention and reduction. Another important thing to consider is position sizing, which refers to the number of units invested in the particular security.
7. Stick to your plan and be consistent
Once the plan is complete, it must be tried and tested correctly in order to see how well it works and suits This suggests that plan must suit the investor’s risk appetite,
lifestyle and goals. Avoid making impulsive decision driven by emotions such as fear and greed, remember your plan our plan already should account for what your next steps to be followed are while you are in a trade. In order to experiment first, paper trading and stock market simulators are a great way to start. It lets you explore with different trading strategies; all this trial and error, along with practice helps you decide what complements you best as an investor.
8. Monitor and Evaluate
Make a record of your trading activities, trading strategies used, entry and exit data and the outcomes in order to review your progress. Common benchmarks are market indices, mutual fund performances, fund manager performances and absolute return targets. Evaluate your records in order to identify areas for improvement.
Trading Styles | Scalping | Day Trading | Swing Trading |
Duration | seconds-minutes | within a day | days-weeks |
Frequency | High | Medium | Low |
Profit Targets | Small | Medium | Large |
Level of Precision | High | Medium | Low |
Comments