Trading used to be done exclusively by professional traders in busy offices on Wall Street. Nowadays, though, in Russia and elsewhere in the world, it is accessible to just about everyone with an internet connection and a little bit of money. It is easy to learn about stocks, start investing and monitor your portfolio from your smartphone or laptop. However, don’t dive straight in without a plan. It is absolutely vital to create a trading plan and stick to it. Here are some of the basics of how to create an effective trading plan and commit to it.
First and foremost, don’t go into trading blind. It is extremely easy to get started with a small or large amount of money, so it can be very tempting to dive straight in without much thought. This, however, is a recipe for disaster. Jim, an investor, and an author for The Stock Dork say that “before you even start writing your trading plan, start learning about how buying and selling stocks work. Use all the resources online to develop your understanding of the markets and how people use them.” This is great advice, as it really isn’t as simple as just buying and selling whatever takes your fancy.
But, what exactly is a trading plan, and why should you write one? Well, a trading plan is your own personal guide on when to trade, what to trade, how much to trade, and when to take your profit out of the market. It defines how much you are willing to invest, when, and where. It is crucial to have a trading plan to help you make sensible decisions as opposed to rash emotional ones.
When thinking about any investments, it’s important to decide on a budget. This could be a small amount to start with, just to dip your toe into investing and see how you get on. Or, you may have a little more experience and feel like investing a larger amount. Either way, it’s important to set that budget and stick to it. Just because things are looking good, doesn’t necessarily mean you should throw extra money in. Be strict, and only spend what you can afford.
Next, think about how much time you have to commit to trading. Is this going to be a full-time endeavor or a side-hustle? Can you spend a few hours a day reading about the markets and understanding when to buy or sell? These things matter. If you are able to put a lot of time in, you’ll likely understand your markets and shares better, giving you more ability and confidence to invest larger sums. If you’re short on time, you should probably invest at a lower level to start with.
Working out how much risk you are willing to take is key to trading. Many first-time traders like to invest in lower-risk bonds, shares, or funds to test the waters of trading. These are traditionally long-term, low-risk, low-reward funds, meaning you will be almost guaranteed a return on your investment. Remember, every share has a risk and prices change by the minute. There is a risk-reward ratio used by traders to figure out the potential profit and loss on a particular share. This is a key thing to understand when investing in individual stocks and companies.
It’s also important to set out high and low-level limits in your trading plan. You should decide at what level you will be happy to cash out on particular stocks, both at the high and low end of potential returns. You can buy and sell however many times you want, so cashing out doesn’t mean the job is over. This, much like setting initial limits, helps keep you focused on the overall goals whilst not making emotional decisions based on quick changes in the market.
With all these things in your plan, you can start to set out realistic targets and potentials for your investments. Without a plan, you could throw all your money into something you don’t understand, leaving you with unfortunate losses. Remember, trading is a risk, but having a proper plan in place can help mitigate that risk and, at the very least, make sure you’re investing as smartly as you can.
