When making decisions in the market, clarity is one of the strongest trump cards of a skilled trader. This can only be achieved through a well built plan that takes into account every major probability.
It is important to understand that stock trading always deals with a constant flux of probabilities. As such, we want our trade decisions to follow a well thought process that captures major market probabilities. This way, we always know the right response for each market move.
In this post, we will cover a basic process-oriented approach to help you achieve clarity in your trade decisions.
Handle the process well and the results will follow
Success in the stock market is no accident. This is achieved through continuous proper planning and disciplined execution. Profitable traders are successful because they have committed themselves to a disciplined process of continuous market mastery.
Everyone wants to win big in the market but only a few understand the rigorous process that has to be done in order to succeed.
The iceberg illustration above perfectly shows the level of effort, discipline and commitment needed to succeed consistently in stock trading.
The more you study and prepare, the better the results will be.
Building a Trade Process Workflow
For newbie traders, deciding when to buy, sell or hold a stock position can be a very frustrating process. Since there are so many factors that can affect market movement in the short term, traders are constantly bombarded with erratic swings that can trigger impulsive decisions and drive panic.
Having a workflow dictate the movement of your trade process allows you to build a rules-based mechanism that prioritizes risk management and high quality trades.
Here are two basic templates you can use to build your own trade process workflow:
Basic Decision Flow for Buying
Each trader has their own criteria when selecting which stock to buy. The goal here is to be able to clearly define the criteria and use it as the basis for your workflow.
Your own personal trade criteria that is unique to your strategy becomes the trigger point for the workflow. Each step will only proceed if the criteria is met. Otherwise, you simply wait patiently.
Here is a basic trade process workflow when selecting which stock to buy.
Notice that the starting point is market monitoring. That is because a skilled trader is always watchful of market movement. You do not have to trade all the time. You only buy when your 'buying criteria' is met.
Basic Decision Flow for SELLING
You only need to sell your stock position when there is a compelling reason to do so. Otherwise, you simply hold and wait.
When building a workflow for your trade selling process, technical trade signals will usually be the main trigger points. These trade signals depend directly on your investment horizon and strategy. A long term investor will look at a larger timeframe and thus have different trade signals than a short term trader who is looking at a smaller timeframe. This means that you have to clearly define first the signals specific to your strategy before you can build a trade process workflow.
Here is a basic trade process workflow to determine when to sell your stock position.
A key mechanism you'll notice in the workflow above is that it accounts for every major probability that may happen.
These probabilities usually cover these market scenarios:
The price moving according to your plan and reaching your target profit level
The price moving against your plan and breaking below your entry level
The price pulling back deeper than expected
Note that a trade process workflow for selling will always have these 3 major scenarios accounted for. Having these clearly defined allows a trader to have an appropriate response for any major market scenario that may happen.
Clarity always leads to confident execution. When you are able to practice the right trade process, your profitability will immensely improve.
For more reference on market signals and stock selection, read our previous posts:
in a nutshell
In order to repeat successful trades, a trader must develop and consistently apply a process oriented strategy that is based on objective analysis and thorough research.
Skilled traders value clarity above all. When the plan is clear, executing the strategy will be simple and straightforward. Often times, most of the losses in stock trading is due to impulsive decision making brought about by the lack of proper planning and experience. To avoid this, we want to have a strategic process that we want to follow every time we decide to buy, sell or hold a stock position.
Following a well-built workflow allows a trader to become process oriented. It provides clarity and shows the appropriate response for every major market scenario. When consistently applied, you'll notice a big uptick on your trade performance. Remember, when you handle the process well, positive results happen!
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