Know these 11 Steps; otherwise you’ll never make MONEY in the Market!
There is an old saying in business: "Fail to plan and you plan to fail." Those who are serious about being
successful, including traders, should follow these eight words as if they were written in stone. Ask anyone who
makes money on a consistent basis and they will tell you, "You have two choices: you can either systematically
follow a written plan, or fail."
If you have a written plan, well done! You are in the minority. While it is still no guarantee of success, you have
eliminated one major roadblock. If your plan has flawed techniques or lacks preparation, your success won't come
easy, but at least you are in a position to chart and modify your course. By documenting the process, you’ll learn
what works and how to avoid repeated costly mistakes.
Whether or not you have a plan now, here are some ideas to enhance the process.
Basic Disaster Prevention
Trading/investing is a business, so you have to treat it as such if you want to succeed. Reading some books, buying
a program, opening a brokerage account and starting to invest is not a business plan - it is a recipe for disaster. If
you don't follow a written plan and test your plan by paper trading then make adjustments, you’ll attract disaster
Even with the best program, market data and analysis, odds for consistent success range from slim to none without
a written plan. Like anything else in life, a good plan evolves, changes, and should improve over time.
A plan should be written before you start trading or investing, but subject to re-evaluation. Any plan will change
with market conditions and adjust as the trader's skill level improves. Each trader should write his or her own plan,
taking into account personal styles and goals. Using someone else's plan will not reflect your characteristics.
However, you should have a trade/investment organization that can guide you. Will they educate you and assist
you in the development of your plan. For example, I’m a member of BigTrends.com. They have everything I need
(in my opinion) to succeed. There may be other organizations that will be just as good in education but you’ll have
to make that judgment call for yourself.
Building the Perfect Plan
1. Skill assessment - Are you ready to trade? Has your plan been tested by paper trading it and do you have
confidence that it works? Can you follow your signals without hesitation? If not, it's a good idea to obtain
some education before you start trading. This will teach you how to think in terms of probabilities. Trading
in the markets is a battle of give and take. The pros are prepared and they take their profits from the rest of
the rest who, lacking a plan, give their money away through costly mistakes.
2. Mental preparation –Do you feel up to the challenge? If you are not ready, it is better not to trade -
otherwise, you risk losing. Be prepared for the trading day.
3. Set risk level – How much of your portfolio should you risk on any one trade? It can range anywhere from
around 1% to as much as 10% of your total portfolio value for each trade. That means if you lose that
amount, you get out and fight another day. This will depend on your trading style and risk tolerance.
4. Set goals – Before you enter a trade, set realistic profit goals and set risk/reward ratios. What is the
minimum risk and/or rewards you will accept? Many traders will set a potential profit percentage. For
example, your stop loss can be set at 20%; your profit margin can be set at 25% and at that point you begin
taking partial profits. Set weekly, monthly and annual profit goals in dollars or as a percentage of your
portfolio, and re-assess them regularly.
5. Do homework –Index futures can be a good way of gauging market mood before the market opens. What
economic or earnings data is due out and when? Decide whether you want to trade ahead of an important
economic report(s). Remember you’re trading on probabilities; if you don’t feel comfortable, don't gamble.
6. Trade preparation –Whatever trading system and program you use, set alerts for entry and exit signals;
make sure all signals can be easily seen or detected. Remember, this is a business, and distractions can be
7. Set exit rules – Most traders make the mistake of concentrating more of their efforts in looking for buy
signals but pay very little attention to when and where to exit. You must know when you’ll exit the trade.
Your trading plan should be very specific.
8. Before you enter a trade, know where your exits are (will be). There are at least two for every trade.
First, what is your loss percentage if the trade goes against you? It must be written down. Second, each
trade should have a profit target. Once there, sell a portion of your position and you can move your stop
loss higher. As discussed above, never risk more than a set percentage of your portfolio on any trade.
9. Set entry rules – This comes after the exit rules; exits are far more important than entries. Your system
must set entry rules. Certain indicator(s) can assist you in entry (and exits). You’ll have to know how to
edit the indicators (don’t rely on the default settings—back tested custom settings from your education
organization will benefit you more) and you must know how to read the indicators.
10. Keep excellent records – All good traders are also good record keepers. If they win a trade, they want to
know exactly why and how. More importantly, they want to know the same when they lose; they don't want
to repeat unnecessary mistakes. Write down details such as targets, the entry and exit of each trade, date
and time, record comments about why you made the trade, market condition(s) and lessons learned.
11. Perform regular reviews – Go back and analyze the profit/loss for your particular system, average time
per trade (which is necessary to calculate trade efficiency), and other important factors. Remember, this is a
business so treat it as such. After each trading day, week, month, quarter or year, review your past trades.
Adding up the profits or losses is secondary to knowing the why and how. Write down your conclusions in
your journal so you can reference them again later.
Don’t trade with real money until you have paper traded and tested any investment you decide to make in real time
market conditions. Paper trading will increase your probabilities to succeed. Another factor to control is emotions;
learn to control this and build confidence. Your system is less important than gaining the skill to make trades
without second guessing yourself.
The probabilities will be based on the win to loss ratio. For example, the Bigtrends system I use has a 68% chance
of profit versus 32% chance of loss. There is no such thing as winning without losing. Don’t kid yourself, you will
lose; however, it’s how you control the loss that’s important. Know before you enter a trade that the odds are in
your favor that you will make a profit. Learn to take profits and cut losses short; you may lose some battles, but
you’ll win in the end. Traders who win consistently treat trading as a business. A plan is crucial if you want to
become consistently successful and survive in the trading or investment game.
PLEASE REMEMBER THE SAYING:
“FAIL TO PLAN AND YOU PLAN TO FAIL"