What Is Your Trading Plan ?

What Is Your Trading Plan ?

In markets like right now with lots of news about countries defaulting, more fed intervention, USA debt ceiling limits,etc….it can be exhausting to an investor if you have no plan. If you are proactive with your investments then you need to have a plan or discipline.

Even more important than just having a plan though is having a plan that makes sense and is realistic for your investment style and risk tolerance(example, you can’t expect 100% win ratio or make 100% return with no risk,etc….).

You need to understand why the method or disclipine that you follow is going to work and also realize that no method is perfect in all markets. There will be ups and down and if you feel like you are letting your emotions take a hold of your investments then either get out of the market/sit in cash or move your accounts to a professional manager that can keep you from making those mistakes.

There are all types of traders and methods so it is important in times of volatility to make sure you are following a investment plan that works for you and your risk tolerance. Anyways, back to a plan…..in a choppy market like right now if I am an option seller then I am happy being on the sidelines waiting for a trend to emerge. Trying to guess direction or predict outcomes is a recipe for disaster as your will get hit sooner or late.

Below is a chart of the S&P 500 that shows how volatile it has been with low volume rallies(oops-sorry volume is cut off in picture) and a market that have been in a flattening, range-bound trend for months. If you have a plan then you are watching your individual stocks and waiting for your price points. You are aren’t fighting the trend by letting losses get too big and you understand that you don’t have to be right in the market every day to make money. Why not just wait until the market breaks out of this range or at least bounces off support on volume before taking any bets. The more times a price level is tested and becomes obvious to the market then the more significant that level will become.

S&P 500 chart

Write out your trading plan.

  • Write out the criteria you use to determine if market is in an uptrend or downtrend.
  • Write out your risk/reward you will allocate for each position.
  • Determine your position sizing based on where your stop loss will be.
  • Follow a strict discipline for price targets.
  • Write out all your trades and evaluate what you did right and wrong.

So turn off CNBC, create a watch list of stocks showing strength, watch the major indexes support/resistance, and don’t be afraid to just sit on your hands if the market isn’t right for your investment style or plan.

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