As you begin to prepare for trading and setting up your trade plan, there are some elements that you will need to have a firm grasp on before you get started.
These are:
What are your goals?
Are you going to be a long-term investor or a short-term trader?
How much money are you planning to invest?
Do you have the necessary resources to invest?
What is your risk threshold?
Do you have the base of knowledge you need for the investments you’ve chosen?
Will you invest in stocks, bonds, or options or other markets?
Initially we’ll take each of these topics individually to help you create your own personalized trading plan.
A) What are your goals?
Before you can begin setting up your trading plan you will need to make sure you have a clear understanding of the goals you are setting for yourself. Keep your goals realistic, investing/trading is a business. You should establish long and term goals and you should revisit your goals often to see if they have changed and if they have what you need to do to meet your new goals.
B) Are you going to be a long-term investor or a short-term trader?
The answer to this question will be one that you must answer before you begin your investment model. You may find that a combination of the two will be the most suitable for your long term goals. Long-Term investors may find it easier to invest in stocks and bonds, while a short-term trader may opt for either lower priced (higher risk) stocks or options or even futures trading. You must evaluate the risk/reward of each investment you choose. Remember that setting these expectations early is fine, but you must always go back and review/revise if something isn’t working the way you originally anticipated.
C) How much are you planning to invest?
The amount you plan to invest at any one time will significantly impact your trading plan. As a general rule of thumb, regardless of how solid your trading plan is (or will develop to be) you should never plan to invest more than you can comfortably lose. The stock market (like many other things) is not a guarantee of a profit and from time to time it is possible to lose 100% of your investment.
D) Do you have the necessary resources to invest?
This goes back to the above statement of not investing more than you can afford to lose. It would never be recommended that you invest all of your savings into the stock market (unless you were investing in 100% guaranteed investment return things like a money market account), so that if you lose your investment you will have no reserves. Carefully plan your investment amount and ensure that you will not suffer irreparable financial problems if you should lose your investment.
E) What is your risk threshold?
Our ability to tolerate risk varies at different points in our lives. Those in their 20′s to 30′s with a long way to go until retirement and sufficient financial means may have more free cash to invest than the investor in their 40′s to 50′s with a home, children headed for college, and closer to retirement. Your individual tolerance to risk will dictate what your threshold will be. Pure growth stocks offer individuals a higher risk for a potentially higher reward, while purely income investments will offer a lower risk but potentially a lower reward as well.
F) Do you have the base of knowledge you need for the investments you’ve chosen?
Before you consider investment in any type of vehicle you will want to fully research what you’ve selected whether that is a stock, bond, annuity, option or future. It is critical that you gain a base understanding of the trading cycles, dividends (where applicable) and what the tax ramifications of your investment(s) will be. You may want to start off with a combined portfolio of investments and you will need basic knowledge of each component of your investment portfolio before you begin so that you will understand the variations as they occur in your portfolio to assist you in changing your strategies in your trade plan.
G) Will you invest in stocks, bonds, or options or other markets?
Whichever investment vehicle you’ve selected, you will want to build your trade plan around that investment. If you are considering a variety of investments, you will want to identify each of them in your trade plan and identify what your goals are for each of them, how much you want to invest in each and what you are looking for in terms of growth.
You can video an example of my video tradeplan on YouTube here: http://www.youtube.com/accendotraders or on my space at http://www.myspace.com/accendotraders
You can view my blog on trade plans at http://blog.michaelglass.com.
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