Did you know that there is an opportunity cost associated with every dollar of cash that you hold in your drawer? According to the time value of money, one dollar today is worth a lot more than the identical sum of the same in future. This is because the cash that you have today can be invested somewhere for interest income.
Investing your money in stocks is important not just because of the opportunity cost associated with the funds that lie idle, but also because it guarantees a passive stream of income for you in the future.
However, to make the most out of your investment, it is necessary that you have a viable trading plan! Let’s see how you can build yourself one easily:
What is a trading plan?
A trading plan is nothing but a systematic set of rules and guidelines that define your trading behavior in the future. This plan takes a number of factors into consideration, including the investment objective of the trader, market risk, and total time frame of the investment.
Ideally the objective of creating atrading plan should be profit maximization. Here’s how you can build one:
Step#1: Disaster avoidance
Your trading plan should ideally never be the final verdict. Markets conditions change as per policy makings and the economic course of events. Your plan should always be open to reevaluation and reconsideration, keeping the changing events in mind. This way you can avoid disasters and losses in case the market for a certain asset class underperforms. You must be ready to see when the market pauses or reverses, and should take the next step accordingly.
Similarly, your plan should be highly personalized, considering your personal trading styles and preferences. If you take someone else’s trading plan and expect it to work in your favor, you’re setting unrealistic expectations for yourself.
Step#2: Quantify your risk
Investing isn’t guesswork. It’s easier to say that the amount of risk you take determines your returns, but is it really easy? As a part of your trading plan, you also need to fully access the risk you can take. This risk has to be calculated, well defined, and quantified. Every investor has a different risk tolerance which can range anywhere between 1% to 5% for a specific trading day.
Other than the risk, your trading plan should also include the risk to return ratio that you’re expecting. This will help you be more well informed as far as the investment goals and objectives are concerned.
Step#3: Exit rules
One of the most common mistakes made by investors is that they don’t decide when and how to exit the market, if need be. Entry and exit rules are as indispensable a part of your trading plan as everything else. Let’s say the stock prices go down and you need to sell off all the shares that you hold, you can’t exit the market abruptly. There has to be a well planned and well thought out exit strategy that ensures minimum losses.
The best way to build a trading plan is to learn a few tips and tricks from the experts. If you want to learn how to start investing in stocks Raleigh NC, get in touch with US Stock Advisor. They provide a wide range of online stock trading courses that will suit your individual requirements. Contact them now.
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