Every market can either make you a fortune or ruin you. Every stock has its corresponding risk and reward. Every trader can be a success or a failure. It all depends on your strategy and how you execute it on a consistent basis.
A well crafted strategy will tell you when to buy or sell, what to buy or sell and when to just remain in cash and wait for better timing. Without this strategy, a trader will simply be guessing. When you come to the market without a plan, you may get a few lucky streaks but you will eventually end up with big losses. As such, profitable traders never fall in love with the market nor in a stock. Instead, they fully commit to the trade strategy and execute it to perfection.
In this post we will emphasize the importance of strategic planning in trading and provide you a brief guide to help you plan for one.
The Sea and the Fisherman
Let's fire up our imagination a bit and imagine the market as the vast open sea. A place of rich resources and treacherous dangers. Now imagine the stock trader/investor as one of many fishermen voyaging this sea with the common goal of catching fish to sell for profit. To do this on a consistent basis, they have strategies and techniques to be able to curb the risk of sea voyage while being able to catch the fish of their choice.
Fishermen who wants to harvest the bounty of the sea will have to plan their voyage carefully to consistently get a profitable catch. Veteran fishermen never sail to sea without a plan. They never catch fish without bringing the necessary equipment. And they know that at times they might have a bad day and catch nothing. Thus, a strategy is critical to ensure long term success.
Stock trading is no different from this. The market is both a place of opportunity and risk. To be able to consistently land a profitable trade, a trader plans carefully to curb risk. Each trade will always have a chance to fail. So if it does, a trader must know the needed steps to mitigate the damage. A trader with a well crafted strategy knows the exact patterns to look for in the chart. As such, he waits patiently for the proper signals to show before he buys or sells a stock.
Profitable traders have a strategy
New traders usually come in the market wanting to get rich quick. They skip building a strategy cause it is too much work. They look at news and social media to easily find a recommended stock that will make them an instant millionaire. They rush in for the trade. To their surprise they get wiped out with big losses. Then they get traumatized and quit. This is the common experience of new traders. It has been often said that when you fail to plan, then you are planning to fail. This wisdom applies to the stock market as well.
When traders become serious, the first thing they do is conduct heavy research to build a strategy. A trade strategy is also referred to as a trade plan. This contains all the elements needed to be able to determine what stock you should buy and when to buy and sell it. Each strategy is inclined on a specific type of trade technique that will dictate what technical chart patterns, formation and signals you should look out for.
A basic trade strategy/plan will contain the following elements:
The BUY signal. Exact patterns that point to a specific entry level.
The CUTLOSS point. This allows you to get out of the trade with minimal losses if the setup fails.
The STOPLOSS point. If the price rallies, this allows you to protect your profit while riding the bulk of the rally.
The SELL signal. Exact price patterns that show you when to take profit.
To know more about how to build a trade plan, click here.
Align your strategy to your lifestyle and risk preference
The type of stocks you can buy and how long you hold them depends heavily on your lifestyle and risk appetite. Your lifestyle plays an integral role in the investment choices you make. People with demanding careers may not be able to monitor the market as much as they want to. A long term investment strategy through an index fund may be the best option for them. If positioned at multi year support levels, this can be a strong investment vehicle as the market moves up again.
For those who are truly interested in trading and speculation, an active trading strategy is a good option. Active traders who buy and sell stocks in the short term have the time to monitor the market daily. They have the passion and discipline to regularly analyze the charts and interpret price action patterns. They prefer volatile and speculative stocks since their skillset and trade plan are built specifically to handle the risk.
As you build your strategy, examine yourself and be honest on what approach best fits your lifestyle. If you do not have the time to monitor the market, your options will be limited to medium and long term trade strategies. However, if your daily schedule can accommodate it and you are serious to become a skilled trader, then short term strategies that provide high risk:reward is an option for you.
To help you determine what strategy fits you best, here is a basic guide:
Passive Investing
Goal: To build wealth over time
Risk: Low
Strategy: Cost Averaging
Holding Period: Long (8yrs - 10yrs)
Type of Stocks: Index Fund, Blue chip stocks
Active Investing
Goal: To leverage on stocks with high growth potential
Risk: Low - Medium
Strategy: Position trading, momentum trading
Holding Period: Medium - Long (2yrs - 10yrs)
Type of Stocks: Undervalued stocks with strong fundamentals
Active Trading
Goal: To generate income
Risk: High
Strategy: Momentum trading, Reversal trading, Swing trading, Day trading (scalping)
Holding Period: Short ( intraday - a few weeks, depending on the strategy used)
Type of Stocks: Any stock (usually speculative issues) with high volume and good technicals
In a Nutshell
Trading is all about calculated risks. Before you even press that ‘buy’ button, your decision to enter that stock must have already been supported by rigorous planning and research. There is no room here for blind guesses and impulsive choices. Everything is carefully planned in advance so that every ounce of risk is accounted for. This is why a trade strategy is critical. Without a sound plan, you are simply gambling your money to blind chance. Uncertainty breeds fear and fear results to panic. So if you want to trade with clarity and confidence, do your research and build a trade strategy that aligns well to your needs.
Most people want to earn big in the market, but very few have the discipline, commitment and patience to work for it. Know that much of the work done to achieve consistent profitability is in your plan and your ability to execute the plan on a consistent basis.
We hope you loved our posts! To learn more about trade and investment, access the Online Learning section of our website to enjoy our free Learning Module.
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