A stock trading plan is a set of rules and guidelines that you use to implement your stock trading strategy and spells out when to buy and sell and at what prices. Every single trade that you make must be in accordance with your stock trading plan. It is very much like a business plan that every company draws up except this plan is specific to your stock trading business. The company business plan will spell out how the company is going to operate and covers all the aspects of business from finance to marketing. Similarly your stock trading plan would create a blueprint for your stock trading business and detail your timing, your prices and other essential components.
There are many things that you should think about it in the process of creating your trading plan. Some of these include:
- When to buy a stock and enter a trade
- At what price you intend to buy
- Relevant current news and information about the stock
- The liquidity of the stock and its trading volumes
- At what price you intend to sell if the price goes up
- At what price you intend to sell if the price goes down in other words your stop loss
- What you would do if the stock trades sideways. Will you continue to hold and if so for how long?
Another essential element of a stock trading plan is to spell out your objectives. Among other things, you will need to identify the following:
- Why do you want to trade in the stock market?
- What do you want to gain from trading?
- What is your expected return on your trading investment in a time frame of one year?
- What do you need to become a better trader?
- What is the strategy or strategies that underlie the trading plan?
You should also define your strategy for buying stocks including:
- How are you going to find the stocks that you wish to trade? [This could include news, stock screeners, fundamental analysis, and technical analysis and so on
- How do you intend to compile and maintain the list of stocks that you might be interested in buying? [Methods of valuation that you would use, strong technicals, strong fundamentals and so on]
- What price you would be prepared to pay for each stock? If the current price is not suitable, would you wait for a better price or simply go on to another stock?
- Does the stock have good trading volume which translates into good trading liquidity?
Similarly your strategy for selling should be clearly defined and incorporate the following elements:
- What is your minimum goal in terms of profit for every trade? This could be $50 per trade or $500 per trade but the price goal should be something that you are satisfied when you sell stock. You should remember that once your goal has been achieved, you should walk away from that position and not be disappointed if the price rises after you sell. After all you have achieved what you set out to achieve.