The key to successful trading and investing lies in discipline. There are many ways to make money in the markets. One can use fundamental analysis, technical analysis or a combination of both. Your fundamental analysis could focus on identifying fast growing companies whose stocks are outpacing the S&P 500 and are within 5% of their 52-week high. Or, a technical analyst may use an oscillator like Stochastics in a sideways market to play trading ranges. Regardless of the strategy, conquering the markets requires finding your inner zen and being disciplined.
Discipline is the soul of an army. It makes small numbers formidable, procures success to the weak, and esteem to all.
–George Washington
In the markets, those who lack discipline will fail. Managing your positions by a set of rules that minimizes risk will keep a trader in the game longer. It doesn’t ensure success, but at the very least, it delays failure. The first step in becoming a disciplined investor or trader is to establish a trading plan. The trading plan will set your rules. If you stay within the structure of the plan, you are less likely to fail. Now, the plan may be flawed, but as long as you control the variables, you will be able to identify the flaws, tweak the plan, and achieve success from failure.
A trading plan is an essential component of any successful trading endeavor. The trading plan must encompass two broad aspects: the trading system and money management. While the trading system — the markets one trades, the entries, and the exits — is important, the true root of a trader’s success lies in money management. Money management governs the profit potential and defines acceptable risk. While the trading system attempts to increase the probability of success, money management tries to reduce the likelihood of failure.
A trading plan must be unique to the individual trader. There is no one-size-fits-all plan. Account size, personality, knowledge and psychology all influence the characteristics of the trading plan. Smaller accounts must seek markets in which the trader can trade. Having minimal capital eliminates some markets all together. A smaller account may be better served investing in equities and may be best to focus on ETFs, specifically. However, account size does not justify ignoring the money management portion of the trading plan. On the contrary, the smaller account holder must focus more on proper money management in order to preserve precious capital. Larger account holders have more asset classes available to trade and larger accounts can remain in the game longer.
There are a lot of variables involved in a trading plan. Over the next two days, I will construct my plan based on my own variables. I will walk through each aspect of the trading plan and try to provide some insight into developing a trading plan. Remember, I, too, am an amateur investor. Take what I say with a grain of salt; but, at the same time, I am not pulling these concepts out of thin air. My trading plan will be developed based on the advice of Dr. Alexander Elder, Marcel Link, Van K. Tharp and Dr. Thomas Carr, among others. Please feel free to provide feedback, suggestions, criticisms of the plan as it develops.
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I am an amateur trader and investor with over 15 years experience in the stock market. I was bred to be a fundamentalist and followed fundamental analysis until 2009. Following the 2007-2008 bear market, I began to shift from a buy-and-hold strategy to trend-following techniques.