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A successful trader would tell you that all you need is
-- to master your psychology, and stick to your trading plan.
-- But, what makes a good trading plan?
Here are 5 simple tips on a good trading plan.
1. Set according to your financial objective(s)
- You should take into account what is your current capital, and how much returns do you aim to (realistically) generate from it on a monthly or annual basis.
2. Caters for the specific strategy of your choice
- Your trading strategy highly depends on your personality and lifestyle, short term trading would require more time. While the longer term trading or investing would require less. Are you a more laid back investor seeking returns in the long run, or do you prefer to be more active and trade daily? Regardless of which, your trading plan should be designed according to the strategy of your choice.
3. Has clear entry & exit criteria ( Risk to Reward )
- What criteria will you use to decide when to enter and exit the market? Not knowing this will cause you to buy and sell based on hearsay or emotions, which aren't sufficient to give you confidence in your trades. Having a clear entry and exit strategies and criteria will provide more clarity and confidence in your trades.
4. Is a repeatable process
- Your plan should have a series of actions that can be repeated on a regular basis. Not only it simplifies the investing/trading process for you, it also helps you approach the market in a systematic way. This will eventually help you save lots of time compared to using a different process each time you trade.
5. Includes journaling
- A journal tracks the outcome of your plan execution. It helps ensure you follow your strategy instead of your emotions, and that you learn from your experiences (especially your losses).
Every investor and trader should have their own trading plan so that they are able to avoid emotional investing. As Warren Buffett said:
"If you can’t control your emotions, you can’t control your money".
Let us all take a step towards managing our emotions and our money. That's all for this week. Look out for our email on the 3 essentials that you need to do before investing next week!