Friday, June 26, 2009

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The Importance of Plan for Your Trading

It is important to have plan for your tradingImage Source

What is the simple thing that separates professional stock traders from novice traders? Are you a trader who trades stocks by the instinct? Or do you trade with a plan? You need to have a plan for your trades from the entry into a position till its exit. Having a plan does the same help for trading stocks as it does for any other profession.

Many traders start trading stocks because it looks like as if it holds some luck for them. Some traders understand that it is not a gambling casino but still continue trading by the instinct. Even the traders who are active and have some experience of past trades still end up doing a lot of trades without any proper plan.

Novice Traders Don’t Have a Plan

Trading stocks without prior study or preparations is what makes it an instinct based trading. For novice traders it is very natural to just jump into a stock that has just made some gain compared to other stocks. They do not even think of the stock making a reversal in the next moment.

Only after several failed trades do many stock traders understand the importance of a plan before executing a trade. Many learn it the hard way. Some traders actually do not bring in a full change in their trading habits. Sometimes they trade well as with their plans. But in between they keep doing trades without prior plans.

With Practice I Learned to Plan

When I started trading since two and a half years back, I too used to trade just like that. In fact I was not a very novice, unorganized trader. But I had studied a little about stock markets and stock price movements before opening my trading account. I had created a list of stocks which I can trade and used to track them well before I started trading. Even after all this I couldn’t control the urge to enter a stock just after logging into my trading account.

It is not when starting trading first time or logging into my trading account. Whenever I close a trade by selling existing stock, for whatever tiny profit that came from my luck, I immediately wanted to put the money to use in some stock. I never used to give rest for it. I think this is the same case for you as well at one point in your trading life. We just don’t get over this thinking of keeping money always at work.

Some trades resulted in profits whether small or big. But some ended down in loss. But I never booked loss initially until my first big loss. It was just part of a powerful bull market that we had for the past years and hence it did not matter. The stocks always bounced back and I used to quickly close the stock after it crossed a little above my buying price. Then again I used to put in some other stock without any plan.

After several trades and few months of time has passed, I started analyzing the progress. I was surprised to see the way my portfolio is growing relative to the market indices. Sensex was making 5% gain every month. But my portfolio was making only 2% and that too with multiple trades, diversified and so on. So I thought there is something wrong. I need to change my trading habits.

No Plan - No Progress

Later as I started looking for best ways to trade and make full out of opportunities, I found several experts’ articles on the internet. Sometimes I searched for books and read them. Though I couldn’t find a perfect book or the books did not match my then wavelength, I noticed that almost all books and experts emphasized the importance of a plan in your trading. They used to say, “It does not matter what you trade and how you trade and so on. If you have some plan for your trading that is all that is needed. You will certainly be on the right path soon.”

Trading without any plan is like a kite flying without being controlled by a rope. It is a complete waste of time and money. The worst still is that many people do not get over this urge to trade without plan. Though they do some trades with plan, they still do some trades by the instinct. It is almost like a habit that we need to unlearn. We can overcome this through practice.

It is only after learning my lessons from losses, not small but big big ones, that I had consciously added planning into my trading. I almost made it a habit. Because of this now I can control no matter what kind of stock you show me today. I can very easily imagine the consequences of entering a trade right now without a prior plan.

All You Need is a Plan, Rest will be Taken Care

If you are reading this article it means that you are consciously trying to improve your trading. Just take a step ahead and start thinking seriously about your past trades and future trades. Answer these questions to yourself before every trade:
What went wrong and what went right?
What can I do better this time?
What stocks should I trade?
What kind of stocks should I track and when should I enter any of them?
Why I should not jump into the next trade?
Can I give my money some rest?
Do I know that I can make a lot better profits even with money engaged in less amount of time?

As you answer these questions you will get out of old habit and start planning your next entry to make it at the best time. You will soon inculcate a habit of trading with a plan. What it takes is an initial effort to change your trading constantly. After few trades, you will automatically change both because of a new habit and also because of the results from these trades.

Next time make trades only with a plan. It does not matter who you are and what you know. It does not matter what kind of plan it is. As long as you have some plan, I can assure you that you are going to become a better trader!

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