The Ultimate Guide to Building a Killer Trading Strategy That Will Yield the Desired Outcome
The share market has seen countless success stories and many abject disasters. The success stories are attractive enough for wannabe investors to rush in to trade, in spite of knowing about the possible risks. It is true that the returns from the stock market are one of the best (over a long term) compared to any other asset class when you also factor in the liquidity it offers. However, it worships discipline and due diligence, not impulsive and aggressive moves which are not well thought out. Every investor must have a well-crafted and thoroughly studied investment plan, which should be religiously followed. The same goes for anyone who wishes to enjoy good returns from his investments. Let us look at how you can devise such a plan for yourself.
Decide the Strategy
You might want to trade within a day, and book profits or you might hold on to stocks for some time and sell them when the stock reaches a certain level. Finally, you could be a passive investor, willing to wait for the dividend payouts only without the constant selling of shares. You need to decide what your investment strategy would be and try to stick to it.
The road to success in stock trading can be very long and arduous, and will usually give you great highs as well as depressing lows. When planning to invest, you should be willing to take the rough with the smooth. It is never a good idea to throw caution to the wind when the going is good or to feel too depressed to continue when you hit a few bumps. A balanced response to stock market highs and lows is needed if you want to keep your physical and mental well-being intact.
Decide Risk Appetite
Your plan will be incomplete if you are not sure of how far you are willing to go, and how much you are eager to put in. The first thing to do is to decide how much capital you are going to invest. You must take note of your monthly liabilities before you determine that amount, and in no case should you exceed that. The second thing you need to decide is how long that capital can remain invested, which will determine how much risk you can take on some calls.
Do a Few Dry Runs
A smart way to prepare for entering the capital markets is to have a few dry runs before actually putting in your money. The account will allow you to select stocks, and buy and sell them, all without buying them for cash. It will be a demo account, which can give you a feel of stock movements and also allow you to try out your investment strategies. You can visit capital.com to open a demo account easily.
You cannot decide one morning which stocks you want to buy. A smart investor would keep a substantial amount of research as part of his investment plan. You need to study different industries, track the latest business updates, and follow the specific news related to the companies whose shares you want to buy for a good amount of time before you start trading. Your research and studies should continue even after you become a semi-pro in trading.
Decide Your Segment
You must have a plan about which sectors you will trade in. Some investors have a particular favorite like healthcare, IT or automobiles, whereas other investors go by the size of the company (small, medium or large). There are also some investors who do not follow any specific segment or industry but build a portfolio by mixing and matching different sectors. You need to decide for yourself what sector(s) you will target.
Set Your Limits
A skilled investor does not stick to his stocks emotionally but knows precisely when to enter or exit. Your investment plan will be more effective if you set some boundaries beyond which you will not venture however tempting the circumstances may be. An example could be a 10% stop loss kind of arrangement (with yourself) or a 10% book-profit decision. It means that as soon as a stock grows by 10% compared to the price you entered at, you will book your profits and exit without getting greedy and waiting for more. Similarly, you need to promise yourself not to get emotionally attached to a stock and exit as soon as your stock loses 10% of its entry price even if you have a feeling it will recover.
Plan to Take a Step Back
Once you get caught up in the daily routine of the stock market, you may find it difficult to, as the poet said, stand and stare. You must set aside time to go over your recent transactions (especially the ones that did not go well) and analyze what went wrong, and what you could have done better. The movements of the stock market are not in your hands. However, you must be able to identify which are the movements you can control by taking timely, well thought out decisions, and see what choices of yours could have been better. You can additionally track your portfolio so that your good and bad decisions have a number attached to them.
It is a habit that many investors ignore because they get too busy managing the daily grind. You should try to develop this healthy habit of recording everything about your transactions. Entry points, exit levels, reasons for entry and exit, even what you were thinking – noting these details can give you useful insights later.
These are nine elements that you should surely include in your investment plan so that you can progress well and not get hit by roadblocks. As you start and continue investing, you will pick up best practices which you can adopt.