Are you ready to get involved in online trading? If so, it's essential to have a plan before doing anything else. A plan is much broader than a strategy. When you make a plan for investing, you write down two or three key decisions about how you intend to operate your business. After that comes the time to make a strategy, which is a more refined, specific set of rules that will guide you from day to day as you buy and sell securities of various kinds. Below, we'll look at how to write a simple plan. Then, we'll dig deeper and get into crafting a strategy that can work well for newcomers.
The Plan
What is your plan? Are you in this to make money, learn how the market works, become a full-time investor for your own account, gain experience so you can eventually become a financial planner, or something else? Simply write down your main reason for getting into the field of securities buying and selling. The final part of your plan, before we move onto the detailed strategy, is to write down one sentence that expresses your expectations about how long you intend to stick with the practice.
For example, is this a life-long pursuit or something you're doing for just a few months? Crafting this very short plan is a great way to gain perspective. Be sure to store a copy of it so you can refer to it later on. This kind of big picture thinking will help you have an open mind about learning new skills. Plus, you'll already be clear about what you want from the experience and won't be overly focused on daily gains or losses.
The Strategy
A sample strategy could look something like this:
The Plan
What is your plan? Are you in this to make money, learn how the market works, become a full-time investor for your own account, gain experience so you can eventually become a financial planner, or something else? Simply write down your main reason for getting into the field of securities buying and selling. The final part of your plan, before we move onto the detailed strategy, is to write down one sentence that expresses your expectations about how long you intend to stick with the practice.
For example, is this a life-long pursuit or something you're doing for just a few months? Crafting this very short plan is a great way to gain perspective. Be sure to store a copy of it so you can refer to it later on. This kind of big picture thinking will help you have an open mind about learning new skills. Plus, you'll already be clear about what you want from the experience and won't be overly focused on daily gains or losses.
The Strategy
A sample strategy could look something like this:
- Learn how to follow experienced investors after having copy trading explained in detail.
- Avoid risk by engaging only in certain types of trades, even when this conflicts with what the lead trader does.
- Manage capital in such a way that no more than a fixed percent of my account balance is ever spent on a single purchase.
- Set stop loss and stop limit points on every trade, whether or not the leader does.
- Spend at least one hour practicing on a trade simulator each week.
- Re-evaluate the lead trader's success rate at the end of each month and decide whether to find a new person to follow.
Of course, the above points are just a sample of what you might come up with after you think about the question for a while. Below, we'll look at each of the six concepts in more detail.
What is Copy Trading?
When you simply follow the trades of an experienced investor, you're engaging in copy trading. For newcomers, it's one of the simplest, safest ways to learn the ropes, protect capital, and gain an understanding of how the markets work.
Minimizing Risk
Some people are more risk averse than others, but for newcomers, it's important to learn about risk management. For example, even if the person you're following buys a low cap share, one that costs less than $5, it is a good idea to not follow that move. Low caps are extremely risky and as a beginner, your goal is to preserve your account value. Consider sitting out some trades that appear too risky.
Managing Your Money
How much money should you spend on each position you take? In other words, when the suggested trade is to buy ABC Corporation shares, and they cost $20 each, how many should you acquire? It helps to have a rule about how much you'll invest on a given transaction. Some new traders limit themselves to one percent of their available capital. If you have $6,000 in your account, one percent is $60, so in the example above, you'd buy three shares of ABC stock.
Stops and Simulators
Consider placing stop loss and stop limits on each trade. That way, when prices fall, you'll be automatically taken out of the position. Likewise, when prices rise, your gain will be locked in as you exit.
Re-Evaluation
Every so often, decide whether you need to find a new trade leader to copy. Some new account holders stay with the same person. Others switch every month or so to get different perspectives about how to buy and sell. It's important to know in advance how you will be operating your new business. Making a plan and developing a detailed strategy are two actions that will make your entry into the securities markets much more enjoyable and rewarding.
