PLANNING - highlight for becoming a profitable trader

Having a plan is the first step for doing everything, especially in stock trading. Do you know that most traders lose money in trading during the first year, and some even lose all the trading capital. Most individual investors don't start out with much capital in trading, so a few bad trades can take away at least half of the money. In the market, about 10% of traders make money while 90% lost it.

WHY??? The 90% of the traders who enter the market are driven by emotions of GREED and FEAR, and DO NOT have a good money management plan. Also, the lack of proper trading techniques is another major reason. Every new investors think when the trend is there, stocks go straight up. The FACT is no stock will go straight up, simple enough.

Before making a trade, please know the risk and reward for the stock you are about to enter in position. Does the risk and reward ratio justify placing the trade? If the risk and reward is about 1 or less, don't make the trade. You are likely to lose on the trade. Please remember the goal for trading is to make profit. For new traders, the very least goal is to preserve the trading capital. Trust me, it’s not easy for new traders not to lose money for the first year without any market knowledge and plan.

What is a trading plan? A trading plan is a guideline that focuses on consistently making good trading decisions. Many decisions will be made during a trading session, and external factors such as news and emotion will influence the thought process. It’s best to stay ahead and define the exit strategy before making the trade. Having a plan to exit in both winners and losers is critical. After making the judgment on the risk and reward ratio, a possible upside target should be determined prior to the trade. Also, when the trade doesn't execute as planned, what is the maximum stop loss. It's very important to set a stop loss prior to a trade and stick with it. Speaking from personal experience during my first year of trading, I don't set stop loss at all. My trades did not go well, and I held on to them and hoped they will go back up eventually. No, it didn't happen and continued to decline, I lost about 50% of the value when I sold a few months later.

The next detail of the plan is about timing. How long should hold the stock for? Holding one stock is an opportunity cost for other trading opportunities. If holding a stock for one year and it does not generate good profit, something is not right on the trade.

Below is a simple trading plan, and it should be customized to fit different trading styles.

1. Determine the risk and reward ratio
2. Have an upside and downside exit target
3. Set the stop loss and STICK with the plan
4. Determine how long to hold the stock
5. Review plan and learn from mistake

The above only covers the basis of Money Management Plan. More details will be added in the future. In the mean time, please spend time to learn about technical analysis. It is an essential tool for trading.