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Creating A Trading Plan That Makes Sense

Aug 17, 2007
This article assumes you have been using a trading journal over the past few months and are finally ready to dive into the stock market using actual money. If you are already involved in the stock market this article can help you to define your investment strategy.

As an investor you need to ask yourself. Why exactly are you investing? Are you looking for that one lucky pick that sets you for life? Sure it has happened to people before, we may even know someone who made their fortune the easy way.

But for every success story we hear, there are 10 stories about failures that are almost never told. People diving head first into the stock market without thinking through a solid investment plan often end up losing their life savings or even worse everything they have. In most of those cases, a diverse trading plan would have protected those investors.

A trading plan is basically a financial road map that helps you get from point A (current financial position) to point B (your financial goals). No one map is going to work for everyone, each map is going to be different, as different routes must be taken based on a persons individual financial situation. So the first step to a solid trading plan is to have your financial goals firmly in mind.

A lot of new investors make the mistake of just stabbing around in the dark trying to figure out what they are doing, but having a trading plan lets you know exactly what needs to be done to become financially secure. Once the financial goals are set you have to determine how exactly to get there. For example, for a person fresh out of high school or college, they aren't necessarily as concerned about retirement or long-term savings.

Younger people can assume a significantly higher amount of risk in their overall portfolio. The balanced portfolio mixes short-term risk with long-term growth. Consider investing a mutual fund that matches the direction want to go, by doing so not only do you invest in broad number of stocks, but you also get the benefit of professional management. Mix this along with funds that carry a very low amount of risk in order to be able to bounce back in the case of any severe market activity.

For those getting into investment a little later in life, a less risk-oriented portfolio should be considered. This allows you to put your money into a relatively "safe" place (keep in mind that even low risk investments can occasionally suffer due to irrational market activity).

By making sound financial decision no matter where you are on your road to financial security, it is important to always have a plan. A strong portfolio is a diverse portfolio. Focusing in only one direction is too risky. Research should be conducted thoroughly first in order to determine what kind of trading plan is right for you. More importantly, seek the help of a qualified professional. Financial consultants can help you determine what kind of realistic goals you can set, and help you to come up with a plan that helps you to meet them.
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