It is aptly said that bulls make money, bears make money but pigs get slaughtered. Those people who do not plan are pigs.
Planning in stock trading involves anticipating sudden rises and falls in the price of your stock and your responses in such situations. You not only need to draw a plan for your short-term trades, but also for your long-term horizon. Your long term planning may include charting out strategies for education, marriage, housing, recreation, vacations, health and also your post retirement life.
Short term planning
If you are a day trader, you might have experienced how the stock prices fluctuate almost every moment. The price fluctuations exercise a deep impact on your trading psychology and even heart beat. Your emotions almost run amuck. You feel like an idiot not knowing what to do especially when the price starts hurtling down steeply.
You even cannot decide even when the stock price starts spiraling up because you get too excited and become nervous. You are more likely to commit mistakes in such situations and suffer losses.
Most of the time, your actions in such situations are guided by fear or greed. Both these emotions can damage your trading interests. You keep dithering between dos and don'ts.
The truth is that you should not try to decide at such critical moments. You should have visualized such situations before entering the trade and planned your decisions as well.
What should constitute your short term planning?
The first and foremost point in your planning should be your strategy to enter a trade and exit it. You have to plan when you will close a position. This primarily means when exactly you should buy a stock and sell it.
You should visualize the conditions that may emerge in course of a trade and how to meet them. For this you should understand the market sentiment, do technical analysis, fundamental analysis or a combination of both.
Your planning should include your strategy to reduce losses to a minimum level so that your financial survival is not put at risk. You should determine in advance the maximum amount of money you can risk not only in each trade but also in all your opened positions. You should calculate how much amount you can afford to lose on daily or weekly basis before you quit trading.
You should also plan your daily routine after the market closes and before it opens. Do not try to find excuses to deviate from your trading plan. If you commit a mistake, try to rectify it.
Your plan should not only include the trading logistics, but also your attitude. You should take responsibility for all your actions. Do not blame the market, your friends, experts, gurus and other events for your losses.
Trading is a game of probabilities. So do not try to guess the future.
Keep reviewing your strategies and plans and make changes or modifications in them as and when you consider necessary. Let your plan be experience based, dynamic and not static.
Long term planning
Planning is essential not only for short term trading, but for long term horizon as well. Think of your life when you will retire from your active work. Think of inflation and how you will annul its effects on your finances. Your long term planning should include devising strategies to make passive income.
For this you should plan to start investing in stocks as early in your life as possible. Consult your stock broker which long term trading plan suits best according to your individual circumstances. Save a fixed amount of money every month from your earnings and direct your broker to draw and invest it in the stock investment plan you have worked out.
There are several long term plans such as opening Individual Retirement Account-IRA-, Roth IRA, Rollover IRA, Education Saving Account and so on. You can opt for Dividend Reinvestment Plans-DRIPs, which multiply your money through compounding of interest.
You may continue to work your short term and long-term investment plans side by side. While your short-term trades will earn you money for your daily needs, your long-term investment plans will provide the security for your post retirement life.
