Without doubt, no trader will last long if he doesn't plan every trade. But there is absolutely no point in making a plan for a trade if you are not disciplined enough to follow it. A plan should cater for every eventuality. As Richard Dennis said,"Don't worry about where the prices are going. Worry about what you are going to do when they get there."
Emotional Trading
Think about what is being said here. Once you put your money down on a trade you can not control the prices. So stop worrying about what could happen and concentrate on you trigger points and what you will do when these points are violated. By doing this your trading stops being emotional and now becomes very systematic and stress free.
Look at this example:
- You like the look of stock XYZ Corp. currently trading at $40 and you place a buy 100, stop in at $42. This is just the beginning. You must then ask and answer the following questions:
- If filled on this trade where will where will I place my initial stop loss? (i.e "How much of my capital am I willing to lose?")
- If filled on this trade how will I take profits? By how much will I trail my stop? What exit strategies will I use?
- If filled, will i add more shares as the trade goes my way?
- If filled and the share does not show a profit after X weeks, will I get out, or will I let my trailing stop exit me from the trade?
- If stopped out of this trade will i be willing to try and get back in, or completely scratch the trade and look else-where?
- So having made a complete plan, prior to entering the trade you place the order to buy 100 XYZ corp at: $42.
- You are filled at $42 1/4, automatically you place a stop order in at $39. No guessing it's done automatically.
- The trade goes your way and a second buy order is placed in at $50.
- You buy 100 more at $50 and the stop is now moved up to $45.
- The trade goes your way and you keep raising your stop at a safe distance behind.
- Your sell stop is hit at $130 and you exit the trade with a massive profit.
Do you see now that by having a plan everything becomes automatic. You know where to get in, place stops, add and exit. In short you are now trading professionally and not from emotion. Not once did you have to ask for opinion. Not once were you afraid of letting a profit get away, or of a loss becoming too big. Simply put, if you make a plan and have the discipline to follow it trading becomes very simple and stress free.
If you ever find yourself having to ask someone for an opinion on a stock you hold then it can only be because you either have not made a plan, or you are second guessing the plan, in which case you may as well not bother making one in the first place.
Stock Trading Plan
Planning a trade should be no different from planning a journey. You must plan for all kinds of events. Especially the unforeseen ones. Most of the time a trade will go your way and the plan will barely have to be looked at but what if the share gaps down? Flys up? Goes sideways for six weeks, the market crashes, the company announces a complete surprise announcement which makes the share gain $30 in one day? If you aren't prepared for these surprises then when one does happen you are going to find yourself wandering what to do. And once your are trading from the 'hip' and not from a plan then expect your results to worsen.
Having a stock trading plan totally removes all opinion and emotion from a trade and anything which does this can only be good news. Time and time again people ask the same questions:
"I bought ABC stock at $25 a few months ago, do you think I should still keep it?"
How can anyone trade such a way? Where is his plan? When he got into the trade where was he get out point? Basically what the hell is this guy doing trading? Does he really expect to out-perform the market when he has to ask a third party about his stock holdings? If this guy had a plan and more importantly the discipline to follow he would never ask such a question.
This is probably the single biggest reason people love to follow opinion. People just love to be told to do something rather than thinking of it for themselves. There is no system. Responsibility has no been shfted to the guru (so there's the excuse for the losses in place). Worse of all they do not have a solid trading plan.
When you start following your own plans you will find yourself not wanting to listen to outside opinion. If you hold ADF stock and bought at $60 and your initial stop loss is at $56 then why would you care if the local guru is saying, "Sell ADF it's over-valued and will fall to $20." For one, he is just as likely to be wrong as right and secondly if your stop is at $56 then let this kick you out of the trade. At least that way when you ask your-self "did I follow my rules today?" the answer will be YES. Could you imagine Warren Buffet thinking, "Gee, I bought $20,000,000 worth of DFG stock and it's down by 15%. what shall I do?" No way! And why should it be any different for your trading? The point is it doesn't matter whether you are trading with a $5,000 account or a $50,000,000 the principles are the same. You must eliminate all emotion and follow YOUR plan.
To be a winner in the markets you can never trade from emotion and the only way to eliminate emotion is to have the iron discipline to follow your own plan. It's said most traders never plan a trade never mind have the discipline to follow one. If you want to become one of the few market winners you must "Plan every trade and trade every plan."
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