My Secret Weapon Could Totally Change How You Trade
As a trader, it can sometimes seem like you’re voyaging into uncharted waters without a map or a compass. Will this stock sink or swim? Will you make money, or will you lose big?
There are plenty of storms you can encounter when trading, so it’s important to do all you can to stay protected and safe.
One of the easiest ways to become safer and more secure in every trade is to make a trading plan.
Your trading plan is like your personal map for a trade. It’s almost like you’re manufacturing your own personal north star for guidance.
When you make a clearly thought out trading plan, you add an essential piece to your trading toolkit. It can make the difference between a good and great trader.
Over the next few days, I’ll guide you through the art of crafting an effective trading plan. You’ll learn about why it’s such an essential tool, and how to create a great trading plan in five easy steps.
What is a Trading Plan?
A trading plan is pretty much just what it sounds like. It’s a written plan where you map out your plan of action for a given trade.
In your plan, you make your intentions clear in terms of why you’ve decided to make the trade, why it’s a good idea, and what you hope to gain.
You also detail the specifics of the trade, including your entry and exit points and stop loss.
The actual format of your trading plan is up to you. It might be an Excel tab, it might be listed in a word document, or it could just be a handwritten note.
The one thing I don’t suggest is keeping the trading plan all in your head. You’re far more likely to stick with it and stay accountable if it’s a physical document.
The Goal of a Trading Plan
Ultimately, the goal of a trading plan is to improve your chances of profiting from a given trade. This is a good thing, so why do so many traders skip making plans?
Because trading plans are not sexy. Many traders ignore them in favor of more exciting aspects of trading, like chasing hot stocks and chart spikes, and looking at news and catalysts.
However, this is a big mistake. While those things are all part of the process, without a trading plan, you aren’t preparing yourself to use all the information you’ve collected to your advantage.
A trading plan offers you the chance to take those sexy parts of trading and apply them intelligently.
While a trading plan is not technically required before you execute that market order, it is something that many experienced traders swear by and credit with an improved track record. Here are some of the specific ways a stock trading plan can boost your trading:
- Tailor trades to your specific trading style. The trading plan helps you take into account things like your personal level of risk tolerance, trading style, and expectations. So in that way, it helps you tailor the trade to suit your style and preferences.
- Makes you consider potential outcomes. It’s incredible how many traders will take positions without ever considering what might happen in the trade. By making a trading plan, you’re forced to consider both best and worst case scenarios, which can help you remain more tactical.
- Clear plan of attack. A trading plan allows you to have a clear-cut plan of attack for entering and exiting a trade. It makes all the difference between a calculated trade and the “hold and hope” mentality that causes so many traders to lose money.
- Increased accountability. A trading plan also helps keep you accountable. When you create a trading plan, you have a roadmap to follow within your trade. If you follow it, you’ll be far less likely to lose your head and make emotional decisions that can potentially lead to mistakes and losses.
Without a trading plan, you’re gambling more than trading. Sure, you might have some wins, but there won’t be a rhyme and reason to what is working.
If you don’t use trading plans, chances are that your losses will begin to exceed your gains. This can be extremely discouraging and is one of the top reasons why traders give up.
Don’t become one of those cautionary tales. Be sure to take the time to make a trading plan, every time!
Now that you’re sold on why you need a trading plan, let’s talk about how to make it happen.
Create a Watchlist
Before you can develop a trading plan, you have to set your sights on the potential trade. So how do you narrow down stocks to trade from the thousands of potential plays out there? By creating a watchlist.
A watchlist is a short list of potential stocks that you’re considering trading. The number of stocks on your watch list might range from just a few to hundreds, though I suggest that you keep it small, especially if you’re just getting started.
If you’ve ever “watched” something on eBay, it’s kind of similar. You keep track of the companies and stocks on your watchlist so that you can be ready to pounce on opportunities when the price is right.
It boils down to waiting for the stocks to meet certain criteria. Often, you’ll be looking at volume, breakouts or breakdowns, or deviations from a moving average.
How do you set it up? Well, everyone will go about making a watchlist a little differently, but if you want to model yourself successfully, consider how one of my most successful students, Tim Grittani, does it.
Tim starts by narrowing down the thousands of stocks available to only the ones that are up 10 percent or more for the day, with 3 million shares or more trading volume. Depending on the day and the market climate, this might be just a few stocks, or it might be 20 or so.
From that starting point, he goes through every stock on that list and looks at the charts in more detail. Are there any evident patterns, or is there some sort of a catalyst that looks promising?
Typically, this will further narrow down the list and can help you make the choice about whether to take a long or a short position on a trade.
Once you’ve narrowed down your watchlist, you will at this point have a few strong contenders for a trade, and it’s a matter of watchful waiting.
While it’s not easy to monitor hundreds of stocks at once, it’s accessible to keep track of five or so. You can screen and review these stocks on your list frequently.
You might create a spreadsheet and develop a loose trading plan for the most promising potential trades. This will help you to be prepared when an opportune moment presents itself.
Consider these things before allowing a stock a coveted spot on your watchlist:
- Does it stick to a pattern I’ve had success with?
- Is there sufficient volatility/potential for profit?
- Which direction is the stock going pre-market? Up or down?
For more tips on how to create a watchlist, be sure to watch this video.
The Bottom Line
Having a watchlist is a crucial first step to having a trading plan. If you don’t have a solid group of stocks to pick from, you’ll end up picking stocks based on emotion.
A trading plan gives you additional structure to rely on when you are trading, which is invaluable.
Tune in tomorrow, and we will go over my other 4 tips for setting up a trading plan that could completely change the way you look at your trades.
Editor, Penny Stock Millionaires