Your trading plan should be based around your investment objectives, your personality and your starting capital. Trading is different for everyone and it is important to have a plan that is realistic and reects your unique personality and circumstances.
It is rst essential to learn the basics, how and why markets move and research a method that you are comfortable with to trade: ie one that is based on sound methodology, and one you can trade with condence, and discipline. So before you start to trade make sure you have good background knowledge on all aspects of trading. You would not try and y without lessons, and the same is true of trading currencies. If you trade and “shoot from the hip”, or on tips from friends, and stories in the nancial press, you are almost certainly going to end up a loser over time.
Should be one you have decided you have condence in and can implement with discipline. This may sound obvious, but many traders trade in a way that is totally opposed to theirpersonality. For example, if you are impatient and hate giving back any prots then a longtermtrend following system is not for you; youwould probably be better suited to a shorterterm swing trading method.
The utopian dream is to start trading with a small amount of money and make it into a fortune in a few months. The reality is this is unlikely to happen to the majority who trade. The rst thing to do when trading is start with enough capital to take a string of losses. The simple fact is: the less you start with the lower your odds of success. It’s a matter of logic. If you are hoping to get on board one big move, it may take ten consecutive losses before the winner comes. By then your capital could easily be depleted and the move you were hoping for comes without you being able to participate. Always start with enough capital to allow you to take a few losses. If you can you should hold a few trades in different areas to diversify your positions ie “don’t put all your eggs in one basket” and blow your money in one trade. To start with keep your position size small and spread the risk.
What is realistic amount of prot to aim for annually on your starting capital? Many investors when asked this question simply say as much as possible. They have not sat down and thought about it, they simply have read stories of the minority who have made it big and want to do the same. The fact is that most traders’ start with unrealistic expectations and this leads them in to a false sense of security. They ignore the risks of trading; they concentrate too much in one trade and risk too much and end up losing. So what is realistic? Any trader who can achieve growth rates compounded of 30% + per annum is doing very well. Generally, a compound growth of 30 - 50% per annum would place you in the top 10% of traders that make money and this is a realistic goal if you do your homework.
The market is a discounting mechanism and the news you see has probably already been reected in the market price. As newspapers and the nancial press tend to reect the views of the majority they tend to be wrong.Articles and stories can be very convincing and that’s what there designed to be, a good story it maybe, but the chances of you making money out of it are slim. Stay away from these stories and have disciplined technical approach that is helping you understand not only what has already happened, but also what is likely to happen in the future.
If you don’t like losing then you wont like trading, as you will probably have more losing trades than winners. We all want to be right its human nature, but trading involves losing and you need to be prepared for this fact. The fact that you lose on individual trades is not important, its how you run your prots and cut your losses overtime that is. Many traders make money on 50% or less of their trades but by using money management, and maximising their winning trades, they end up making money longer term. Perversely losing is part of winning in trading and is not to be feared.
Don’t Enter Trades Without A Stop
If you enter a stop when you enter a trade you know what the worst outcome is in advance and things can only get better! Also placing stops in advance means you will remain disciplined. Chances are, if you don’t put a stop in the market in advance, you will be tempted to let the trade stay on a little longer to see if it will turn around. Invariably it doesn’t, so a small lose becomes a bigger loss. The aim of trading is to keep losses small and run prots, placing stops in advance is vital way of adhering to this advice.
Don’t Average A loss
This is a method that many traders use to lose money. The logic is simple: when ever apposition goes against you, hold onto it and keeping adding to it so you repeatedly lower your average cost. When the market actually moves your way you will be closer to your breakeven point and quickly end up in prot. The reasoning is logical in a game where no margin is involved and time is not important. In leveraged trading and in particular options trading time passed is lost money. Contracts expire, margin calls continue, and the market invariably moves in the direction you don’t want it to. While you may be right in the long run, you will almost invariably run out of money before the turn in market direction comes.
Don’t Pyramid A Position
This is a sure re way to lose money is to build positions with a top-heavy pyramid. Many investors mistakenly believe that as a market moves in their favour, they must add more and more positions to maximise the move. What happens, of course is the pyramid is built upside down. The more contracts that are added the more top heavy the pyramid becomes. The slightest change in market direction will then send the pyramid crashing down. If you really want to try pyramiding give it a rm base by putting your largest position in the market at the start. Add successively smaller trades as the market moves in your favour. You will still have a good-sized position at the end of the move and your average cost will be much less than with the top-heavy version. Top heavy pyramiding does not generally work so avoid it.
Don’t Trade On Emotion - Stay Disciplined
The enemy of all traders is emotion. Staying disciplined sounds simple on paper but in the adrenalin rush of trading it is hard for all traders no matter how experienced they are to do. The thoughts in this article are designed to give you some idea of how to construct a plan that will help you trade a sound logical method, with discipline and avoid some of the most common pitfalls that novice traders make that are a product of their emotions.
It is rst essential to learn the basics, how and why markets move and research a method that you are comfortable with to trade: ie one that is based on sound methodology, and one you can trade with condence, and discipline. So before you start to trade make sure you have good background knowledge on all aspects of trading. You would not try and y without lessons, and the same is true of trading currencies. If you trade and “shoot from the hip”, or on tips from friends, and stories in the nancial press, you are almost certainly going to end up a loser over time.
Should be one you have decided you have condence in and can implement with discipline. This may sound obvious, but many traders trade in a way that is totally opposed to theirpersonality. For example, if you are impatient and hate giving back any prots then a longtermtrend following system is not for you; youwould probably be better suited to a shorterterm swing trading method.
The utopian dream is to start trading with a small amount of money and make it into a fortune in a few months. The reality is this is unlikely to happen to the majority who trade. The rst thing to do when trading is start with enough capital to take a string of losses. The simple fact is: the less you start with the lower your odds of success. It’s a matter of logic. If you are hoping to get on board one big move, it may take ten consecutive losses before the winner comes. By then your capital could easily be depleted and the move you were hoping for comes without you being able to participate. Always start with enough capital to allow you to take a few losses. If you can you should hold a few trades in different areas to diversify your positions ie “don’t put all your eggs in one basket” and blow your money in one trade. To start with keep your position size small and spread the risk.
What is realistic amount of prot to aim for annually on your starting capital? Many investors when asked this question simply say as much as possible. They have not sat down and thought about it, they simply have read stories of the minority who have made it big and want to do the same. The fact is that most traders’ start with unrealistic expectations and this leads them in to a false sense of security. They ignore the risks of trading; they concentrate too much in one trade and risk too much and end up losing. So what is realistic? Any trader who can achieve growth rates compounded of 30% + per annum is doing very well. Generally, a compound growth of 30 - 50% per annum would place you in the top 10% of traders that make money and this is a realistic goal if you do your homework.
The market is a discounting mechanism and the news you see has probably already been reected in the market price. As newspapers and the nancial press tend to reect the views of the majority they tend to be wrong.Articles and stories can be very convincing and that’s what there designed to be, a good story it maybe, but the chances of you making money out of it are slim. Stay away from these stories and have disciplined technical approach that is helping you understand not only what has already happened, but also what is likely to happen in the future.
If you don’t like losing then you wont like trading, as you will probably have more losing trades than winners. We all want to be right its human nature, but trading involves losing and you need to be prepared for this fact. The fact that you lose on individual trades is not important, its how you run your prots and cut your losses overtime that is. Many traders make money on 50% or less of their trades but by using money management, and maximising their winning trades, they end up making money longer term. Perversely losing is part of winning in trading and is not to be feared.
Don’t Enter Trades Without A Stop
If you enter a stop when you enter a trade you know what the worst outcome is in advance and things can only get better! Also placing stops in advance means you will remain disciplined. Chances are, if you don’t put a stop in the market in advance, you will be tempted to let the trade stay on a little longer to see if it will turn around. Invariably it doesn’t, so a small lose becomes a bigger loss. The aim of trading is to keep losses small and run prots, placing stops in advance is vital way of adhering to this advice.
Don’t Average A loss
This is a method that many traders use to lose money. The logic is simple: when ever apposition goes against you, hold onto it and keeping adding to it so you repeatedly lower your average cost. When the market actually moves your way you will be closer to your breakeven point and quickly end up in prot. The reasoning is logical in a game where no margin is involved and time is not important. In leveraged trading and in particular options trading time passed is lost money. Contracts expire, margin calls continue, and the market invariably moves in the direction you don’t want it to. While you may be right in the long run, you will almost invariably run out of money before the turn in market direction comes.
Don’t Pyramid A Position
This is a sure re way to lose money is to build positions with a top-heavy pyramid. Many investors mistakenly believe that as a market moves in their favour, they must add more and more positions to maximise the move. What happens, of course is the pyramid is built upside down. The more contracts that are added the more top heavy the pyramid becomes. The slightest change in market direction will then send the pyramid crashing down. If you really want to try pyramiding give it a rm base by putting your largest position in the market at the start. Add successively smaller trades as the market moves in your favour. You will still have a good-sized position at the end of the move and your average cost will be much less than with the top-heavy version. Top heavy pyramiding does not generally work so avoid it.
Don’t Trade On Emotion - Stay Disciplined
The enemy of all traders is emotion. Staying disciplined sounds simple on paper but in the adrenalin rush of trading it is hard for all traders no matter how experienced they are to do. The thoughts in this article are designed to give you some idea of how to construct a plan that will help you trade a sound logical method, with discipline and avoid some of the most common pitfalls that novice traders make that are a product of their emotions.
