Stock Trading Plan - How To Build a Successful Trading Plan

Choose A Trading Style That Suits You
Before coming up with a plan of attack, decide what style of stock trading you prefer.  Sitting at the computer with your main goal of “buying low and selling high” is something that won’t produce consistent profitable results.  The criteria of your plan needs to be more specific.

A successful stock trader’s approach to trading is one that is well defined whereas a losing traders method is vague and erratic.  In any real money trading situation you have to be accurate, consistent and precise, so decide what you like to do and build a solid plan around that.

The two styles of stock trading I tend to focus upon are scalping and swing trading.  Scalping focuses on executing trades for quick profits, whereas swing trading requires holding a position for up to several weeks.  Either trading style will work, but you need to be prepared for any type of market situation and be able to trade accordingly.

Stay Focused and Committed To Your Trading Rules
The best stock trading plans include a set of rules that should never be broken unless your results show a decrease in profits over a period of time.  If what you’re using to make trading decisions is working, then stick with it.

If your results start showing a string of losses then you need to examine why those losses occurred.  Was it due to you straying away from your plan that was working or was it simply due to something you had no control over?

Losing is part of trading and no one executes winning trades 100% of the time.  Traders who remain successful over an extended period of time use a plan that works and they follow it religiously.

Know Your Time Frame
Before placing any trade you need to determine what your time horizon is.  Are you entering a stock trade for a potential quick profit, one where you’ll be in front of the computer for an extended period?

Or will this trade be a long term investment, one where you wont be overly concerned with the daily ups and downs that are sure to take place.  Decide what best fits your trading personality and then execute a trade using the correct time frame.

Manage Your Risk
If you’ve made the decision to execute a trade, you also need to make your own decision when it comes to controlling your losses.  With the current technology and endless amount of financial and trading information that’s available today it’s extremely important that you learn to make your own decision when it comes to exiting a trade.  This goes for both winning and losing trades.

Before you enter any trade, you need to have a stop order in place.  A “stop” is an order to buy above or exit below the current market price of a stock.  Stops are used to protect your trading capital when the share price of the stock you own drops and it’s also a great tool to use to lock in profits when the share price moves higher.  If you’re going to trade, you definitely need to use a stop, especially when it comes to limiting your losses.

Use a Stock Trading Formula for the Number Of Shares
I’m sure everyone has heard the saying, “Never put all of your eggs in one basket,” and this should be applied when placing a trade. No matter how large or small your trading account value is, you need to limit your exposure when executing a trade.

If I enter a trade that I intend on exiting the same day, or the moment it goes against me, I never invest more than 10% of my trading account value.  If I enter a trade with a longer term time frame in mind, I normally only risk 3% of my account.

Over my years of experience I’ve found that it’s easier to manage a trade by risking less.  If you enter a trade and it moves higher you can always purchase more shares and lock in profits on the way up by raising your stops.  If you enter a trade and it continues to move lower, it’s more difficult to recover those losses by adding more shares.  With market volatility being as extreme as it is now, I would never add shares to a losing position.  Remember to always “Plan Your Trades and Trade Your Plan.”

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