Essential Elements of a Trade Plan

As you begin to prepare for trading and setting up your trade plan, there are some elements that you will need to have a firm grasp on before you get started.

These are:

What are your goals?

Are you going to be a long-term investor or a short-term trader?

How much money are you planning to invest?

Do you have the necessary resources to invest?

What is your risk threshold?

Do you have the base of knowledge you need for the investments you’ve chosen?

Will you invest in stocks, bonds, or options or other markets?

Initially we’ll take each of these topics individually to help you create your own personalized trading plan.

A)  What are your goals?

Before you can begin setting up your trading plan you will need to make sure you have a clear understanding of the goals you are setting for yourself.  Keep your goals realistic, investing/trading is a business.  You should establish long and term goals and you should revisit your goals often to see if they have changed and if they have what you need to do to meet your new goals.

B)  Are you going to be a long-term investor or a short-term trader?

The answer to this question will be one that you must answer before you begin your investment model.  You may find that a combination of the two will be the most suitable for your long term goals.  Long-Term investors may find it easier to invest in stocks and bonds, while a short-term trader may opt for either lower priced (higher risk) stocks or options or even futures trading.  You must evaluate the risk/reward of each investment you choose.  Remember that setting these expectations early is fine, but you must always go back and review/revise if something isn’t working the way you originally anticipated.

C)  How much are you planning to invest?

The amount you plan to invest at any one time will significantly impact your trading plan.  As a general rule of thumb, regardless of how solid your trading plan is (or will develop to be) you should never plan to invest more than you can comfortably lose.  The stock market (like many other things) is not a guarantee of a profit and from time to time it is possible to lose 100% of your investment.

D)  Do you have the necessary resources to invest?

This goes back to the above statement of not investing more than you can afford to lose.  It would never be recommended that you invest all of your savings into the stock market (unless you were investing in 100% guaranteed investment return things like a money market account), so that if you lose your investment you will have no reserves.  Carefully plan your investment amount and ensure that you will not suffer irreparable financial problems if you should lose your investment.

E)  What is your risk threshold?

Our ability to tolerate risk varies at different points in our lives.  Those in their 20’s to 30’s with a long way to go until retirement and sufficient financial means may have more free cash to invest than the investor in their 40’s to 50’s with a home, children headed for college, and closer to retirement.  Your individual tolerance to risk will dictate what your threshold will be.  Pure growth stocks offer individuals a higher risk for a potentially higher reward, while purely income investments will offer a lower risk but potentially a lower reward as well.

F)  Do you have the base of knowledge you need for the investments you’ve chosen?

Before you consider investment in any type of vehicle you will want to fully research what you’ve selected whether that is a stock, bond, annuity, option or future.  It is critical that you gain a base understanding of the trading cycles, dividends (where applicable) and what the tax ramifications of your investment(s) will be.  You may want to start off with a combined portfolio of investments and you will need basic knowledge of each component of your investment portfolio before you begin so that you will understand the variations as they occur in your portfolio to assist you in changing your strategies in your trade plan.

G)  Will you invest in stocks, bonds, or options or other markets?

Whichever investment vehicle you’ve selected, you will want to build your trade plan around that investment.  If you are considering a variety of investments, you will want to identify each of them in your trade plan and identify what your goals are for each of them, how much you want to invest in each and what you are looking for in terms of growth.

You can video an example of my video tradeplan on Youtube here:  http://www.youtube.com/accendotraders  or on my space at http://www.myspace.com/accendotraders

You can view my blog at http://blog.michaelglass.com

You want to enjoy the benefits of being a successful trader. However, you don’t exactly know where to start. A Trade Plan can put you on the right track. 

Think of your trade plan as a road map.  It helps you reach an unfamiliar destination successfully and safely, and identify the basics of just where you fit into the trading world.

Just as a map would help you experiment getting to a location in a variety of ways, a trade plan helps you reach your goals and get you back on track if you should make an error.

Just as a road map may be as general as a world atlas, or as detailed as a road map of your local neighborhood, a Trade Plan offers you the means to find your location in the span of world markets, and help you be successful in reaching your trading goals (or setting up shop and growing your business).

None of these concepts are meant to deter or intimidate you, whether you want to earn a little on the side as a ‘hobby trader’ or you have a greater goal of being a larger trading firm some day, all marketing guru’s have the same theory:  Business is all about location, location, location.  Determining your location (your niche) in any industry means proper placement of advertising, matching your products to your customer’s needs – regardless, this will involve using a ‘map’ (your personalized business plan).

Do you often go traveling without a map?  How often to you hear a couple having issues because they head off to a location (which could be dinner or an event such as a wedding) only to turn around because they never brought directions?  As we all know, heading into unknown areas requires direction (or maps).  Maps (directions) are essential in ensuring we reach our final destinations! Trade Plans are essential for the same reason, so we know where we’re headed when we begin our trading (or journey). 

Would you ever consider traveling to Paris France without doing research? Not only is it across the ocean, but their primary language is predominately French.  So there are certain questions you’ll instinctively know to ask:

A)     How much will it cost to get there, what documents do I need

B)     Where will I stay and do I know enough about the language to stay safe in the country?

C)     Do I know anyone who can help or do I have to do this on my own?

You can relate this to someone who is considering trading for the first time, there are many questions that might come up:

A)     How much will it cost me to trade?

B)     Where will I find a broker? 

C)     Is there special language that applies to trading that I need to know?

D)     Can I do this myself or can I find someone to help?

The first steps you must take in learning to trade, are not all that different than they would be traveling to France for the first time.  You will do research – this will uncover a group of plans (maps) that begin with your own desire to trade. 

Like the ‘micro-maps’ that your research on France (such as maps of Paris, tourist locations, etc), a trader will have a set of ‘micro-maps’ of various trade variations.  The next step in both cases will require you to do more search.

Initially, you may think that some of these steps are trivial and little more than common sense, but they can be much more significant than that. These are fundamental steps that if you skip over them, you may find yourself skipping your ‘journey’ altogether. Don’t rely on instinct, research and plan your basic steps. This concept will serve you well wither you are traveling to a foreign country or developing your own personal Trade Plan. 

As you gain experience (as with travel) in the world markets, you will begin to expand not only the number of trades you make, but the types of trades that you make within the world markets.  Each step will require another set of maps to allow you to navigate those markets as informed and educated as well as safely as possible. 

Whether you’re considering ‘bounce trading’, ‘short trading’, ‘option trading’, ‘penny stock trading’ ‘index trading’ or ‘futures trading’ you will find a map that can help you to determine what research you need to do to research and execute your trades successfully.

Once you determine what type of trading you’d like to experiment with first, and to develop your trade plan further, you will want to look at the variety of maps that are available to your area of interest.

INTRODUCTION TO TRADE PLANS              

I.      What is a Trade Plan?

A trade-plan should be considered a map.  Similar to a map that you would use on vacation, a trade plan should point you in the right direction (like a compass).  A trade-plan establishes and defines your route to success by identifying parameters to help you reduce errors.

II.      Components of a Trade plan

A Trade plan, like a map has components. While a map has a scale, interstates, a compass and lists capitals, a Trade Plan has components as well

a.       Investment

b.      Goals

c.       Method

III.      Types of Trade-plans

There are different types of maps (sector maps, scan maps, basket maps and weather maps for instance) and you should have varied trade plans depending on your investment objectives.

 IV.      Effective use of Trade-Plans
Just as maps allow a traveler to get to their final destination, a well thought out and followed trade-plan should provide consistency in your trading and help you reach your goals.  

a.       As a professional, you would never consider attending an interview unprepared, nor would an athlete fail to prepare for an event.   As an option trader, you need to be well prepared. 

b.      A trade plan (like a map) will allow you to see patterns and adapt your trading.

c.       A Trade Plan should help you to recognize patterns, correct and improve on any mistakes you might make.

d.      A Trade Plan is like a checklist or a routine that helps you determine where your investment and helps you determine what your next step should be

V.      What a Trade Plan is:

a.       A Trade Plan is a tool that encourages continuous learning

b.      A Trade Plan allows fine tuning as you compare success and failure

c.       A Trade Plan provides a tracking system

d.      A Trade Plan is a valuable training tool

e.       A Trade Plan is a valuable trading tool

If you purchase 1,000 shares of IBM stock at $100.00 and then estimate that $95.00 is your best technical support level, you need to take action at $95.00  A Trade Plan allows you to be a trader instead of a holder.  A solid Trade Plan allows you to plan, not pray!

View an Example of my Video Tradeplan here:  http://www.youtube.com/accendotraders  or  http://www.myspace.com/accendotraders

Visit my website @ http://www.accendotraders.com