I'm sure you have heard countless times from various outlets about always having a trading game plan. But let's be honest, most traders don't have a solid understanding of the proper execution of a trading game plan. Novice traders emotionally fall in love with a stock and ride it either down to zero or sell at a loss. Often people will just follow others they deem experts (unlikely they are), and that's their trading gameplan.
In reality, this is no way to trade, eventually, your account portfolio will show this, as you will realize you cannot outpace Market returns in the long run. This begs the question, what exactly are you doing wrong? The answer is probably many things, from lacking an actual trading system to having the most basic of a trading game plan.
In this article, I will help break down the essence of a trading game plan. The aim of this is to have you become a much more solid trader, and one step further to possibly becoming the rare Market-beating trader.
Why Have A Stock Trading Plan?
The benefits of having a trading game plan are there to help you remove emotions from your trading, it's there for you to follow when you get caught up in either the stress of everything or the euphoria of holding too long as your gains fade. In other words, a trading game plan is there to help you maximize profits and minimize losses when your emotions become overwhelming.
When things become too much, whether it be your stock squeezing to the moon, or your stock tanking due to general market conditions, your game plan is there to help guide you.
I have compiled a trading gameplan outline below, which involves a series of questions you should have answered BEFORE YOU ENTER ANY TRADE! This will help remove emotions as trading often gets heated.
I doubt you will answer these questions optimally the first time you do it. But it's all about trial and error, about the 10th or 15th time you compose your gameplan from the questions below you will see it's much different than what you originally came up with. Why? Because of experience, you're forced to think about your trades in ways you were not before!
Below are the questions that when answered become a solid trading game plan. Preferably write this down, and answer these questions for each trade going forward. Make sure to review each game plan and figure out what went wrong and what went right as you continue to make trades in the market.
The Stock Trading Gameplan
- How much of my portfolio should I allocate to this trade? This question is important as it helps you sleep at night. If you have too much in one stock and it goes bad, that's when emotions come kicking in with the bad decisions. Ultimately you should be using something like the Kelly Criterion formula for how much you should allocate of your portfolio to one stock. It's all about risk vs reward.
- Do I have a stop loss? If so what price? This is a complicated question to answer. I have huge faith in my trading system, therefore I do not trade with stop losses. But many people don't have such a reliable trading system. Always, determine your stop loss before purchasing a stock!
- What will I do if things go bad? Will you decide to average down or not? Will you hedge your position at the cost of profits? Will #2 trigger, will you follow through and sell?
- What is my stock price sell target? Sometimes, your stock will squeeze hard, and if it does it may be naive to continue to hold. You may be caught up in the emotions as your stock continues to squeeze unexpectedly, that's why you should always have a sell target. So you don't get caught up and lose profits.
- Why do I believe in this stock? This is very important, this really comes from your trading system. Whether the answer is the technicals or a fundamental story or you simply believe WallStreetBets from Reddit will eventually squeeze the stock. Having an answer will allow you to not sell when you start losing patience or when things go bad (#3).
- What is the catalyst for this stock (such as earnings, news events, surprise announcements)? You need to have price-moving catalysts mapped and follow updates daily because these things can change the fundamentals of a stock easily, whether it be for the good or bad. I often hate holding on to stock during its earnings. So the majority of my game plan is "will hold until before earnings and re-evaluate".
- What would make me want to sell this stock? Sometimes things change, maybe a stock has declared bankruptcy but the price hasn't reacted that badly, and that is when you need to adjust things for #2 and #3 above. Because your game plan can't always be static! Similarly on the upside say in #6, fundamentals changed for the positive, at that point you may want to readjust your trading game plan (for example change your sell price target). It's important to be flexible at the same time not emotional. It's hard to maintain that line, hence why trading often becomes a mixture of art and science.
Hopefully, this list can be the start of you having a trading gameplan, with practice and iteration you will see it will start to maximize your profits and minimize your losses. Now all you need is a solid market-beating trading system, and that is not so easy to come up with (as Hedge Funds can't even beat the Market long-term without cheating).
Interested in more articles like this? Make sure to read more about Stock Trading Discipline as well as Ten Signs You Are Probably A Terrible Trader and finally on How to Create A Trading Edge.