Develop A Trading Plan

Everyone knows that when you go to a casino you're playing with the odds of losing, otherwise the casino wouldn't be in business. The same goes for the trading market; if the majority of people made money on the market it would no longer exist since there wouldn't be enough money to pay out the winners. The difference between a casino and a trading market is that the former has the house of a casino is allowed to write the rules so that, mathematically, they must win. Why is it then, that even will all the trading information and the abundance of intelligent and well-informed investors, a high percentage of traders still end up losing money?

One of the most commonly accepted answers is that the average trader cannot control his or her emotional responses well enough to succeed.

Importance of a Trading Plan

The biggest mistake you can make in the investing game is to start trading without having any sort of plan. When you make a stock purchase it's important to have a clear idea of how you're going to handle the stock, that is, whether you plan on taking a quick profit on the first decent upswing or whether you want to hang on to it for a longer period. Deciding this will protect you from making irrational decisions based upon emotional response. The greatest number of losing traders are short-term traders; those that are successful are the ones able to be patient for the long haul.

Trading Diary

Many people remember only their successes and block their failures out of their minds; needless to say this practice can significantly impair a person's judgment. Every intelligent investor understands the importance of keeping a diary in which is recorded all transactions made including price and date. This allows you to determine your total losses or gains and also allows you to recognize and avoid personal mistakes. Try to focus on actual potential profit gained versus profit lost rather than focusing on whether you were right or wrong, this will help avoid potentially harmful emotional responses.

Action Plan

After researching all pertinent markets, an action plan should be formulated which, for each purchase, outlines the goals for that purchase along with personal predictions and other notes concerning where and when the stock is headed. Be rational in your formulation of an action plan; try to predict how the other traders in your market will react to what the market is doing today. Once you have created your plan of action, stick to it. Many losing traders make the mistake of going out and buying something new when they lose; this is a common emotional response but is not conducive to higher profits. When your plan doesn't work, take the time to try and determine why exactly it didn't work and modify your strategy accordingly. Keep in mind that the most successful traders follow a specific system and do not switch systems without careful consideration of the factors involved.

If you are serious about making a profit as a trader, it's absolutely essential to develop a sound trading plan and keep a diary. If you don't, you are basically just spinning your wheels; trading without a specific strategy is always a recipe for disaster.

Learn how true professionals profit by having a clearly laid out blueprint for taking trades.

Next: Be a Disciplined Trader