In what way to Keep the Highs and Lows in Trading
In order to manage your ego effectively when trading, you must create a written plan that you can review at all times to stay focused on your goal of trading success. By making your plan, you put yourself in the top 5% of individuals who have written goals and plans, giving you an prompt advantage on most traders. Make sure you have answered these questions:
How will you get into trades? The root to good entries is putting on trades where there is rather low risk compared to much higher reward. You should also write down a clear catalyst for the expected stock move.
How will you exit trades? You have to set an final stop point for your trade, at the point where the trend is invalidated. You would additionally need a ‘trailing stop’ approach to protect your profits.
What kind of orders would you use to enter and exit? When entering,
I prefer to use limit orders, good for the day only, while exits are frequently market orders. Why? Because limit orders let me to establish my risk and reward clearly on the entry of a trade, while when I need to get out, market orders allow quick exit compared to the risk of missing my exit with a limit order.
How much capital would you need to trade successfully? There are economies of scale as you increase the amount of capital you invest with. Expenses related to commissions, quote systems and equipment begin to diminish as the percentage of capital invested goes up.
What percentage of your capital would you invest in each trade? The amount of capital I typically use is 10% per trade in my own accounts. I know traders who commit anywhere from 5% of their account per trade, to 30% of their account per trade. Your mission should be to keep portfolio risk per trade at less than 2% per trade. For example, if you invest 20% of your investment portfolio in a trade, a 10% loss on that position would lead to a 2% loss on your portfolio.
How many positions will you target on at the same time? I like to focus my investment portfolio on my best ideas, plus I like to stay focused on how each company stock is acting. If my portfolio is too big, Iwould say more than seven stocks is too many to focus on, then I will lose concentration and invariably miss an exit on a trade that I should have previously exited.
What will your trading paper look like? In my trading daybook, I write down daily observations, especially related to my understanding to execute my trading plan.
I also commit to doing a post trade analysis every week. I note what I did right and wrong, and seek to learn from mistakes to minimize tomorrow errors in similar situation, while also looking for winning patterns where I seek to duplicate big successes.
What is your position review process? I suggest you have an end of day technique to close your day. Review your trades, and assess if you followed your plan. Keep a log of all your investments, and make comments on every position.
What is your planning step before trading? You need clear time to prepare for the next trading day and build up your trading confidence. I prepare after the close for the next day’s trading, which allows me to formulate a plan of action before I get into the heat of battle. This keeps my trading proactive instead of reactive.
What broker will you use? Most people wrongly think that commissions are the number one thing they could control. In reality, commissions are a small price compared to the broker’s effectiveness at executing your trade. Your concentration should be finding a broker who gets you speedy and fair execution of your orders.
Once you have defined these facets of your investing plan, you are in an excellent position to have a plan to control your emotions when trading. Make sure to review your strategy on a regular basis to create effective trading habits.