I will never forget a lesson taught to me by one of my business management professors about 25 years ago. He was an elderly gentleman, gray hair, and walked with a cane. As he walked in the room on my first day of class he approached the desk and dramatically slammed his cane on the it saying, “If you fail to plan then you have planned to fail.”
I later found out that the origin of this statement was not his, but it got my attention that day, and has stuck with me throughout life. Trading is a business just like any other, you need a plan, or a road map of where you are heading. For example, when you go on a trip to see relatives out of state, you use a road map, map quest or GPS “before” you hit the road. You don’t know where all the detours, pot holes, traffic jams, etc. are going to be along the way.
So that’s when your general directions as to where your going comes in, so when you get close to your destination you won’t waste time stopping for directions. All successful stock traders have a plan. You will find the one thing they all have in common is that they have a great plan they use to approach the markets with. There are as many plans to follow as there are stocks to trade but you need to find one that fits your personality the best. I’m not talking about you personally, I’m talking about you when you put in your own money.
People react differently when it comes to money. Here’s an example, let’s say risky Rob has $1000 and buys 100 shares of XYZ Corp. at $10 per share. He places an order to sell when the stock reaches $12 per share, and he places a protective stop to sell at $8 per share if it gets clobbered that day. Rob knows earnings are coming out after the bell and after his research. He thinks they will beat the expectations that usually makes this stock rally, so he is willing to take this trade based on him having a working knowledge and history of the stock and its cycle. He knows his chances of success are good, the trend is up, volume is good and sales are going strong.
Timid Tom places $1000 at risk by placing an order to buy 100 shares of the same XYZ Corp. at $10 per share. He heard that the stock is doing well from a guy at work he knows and trusts very well. Tom has a family to provide for and needs the trade to be successful. Tom watches the stock on his computer at work and hopes that it will do well. If it does well after earnings he will most likely hold on to it for a while. If the stock does not report good earnings, it most likely will tank and Tom won’t know what to do. He might try and sell and will loose way more money than he intended to.
Then panic sets in, his personality changes, he becomes angry, irritated and sour because he almost lost all his investments and his confidence. On the other hand Rob will be around to trade another day because his plan was well thought out and properly executed. He had his protection stop, his target set up, his risk tolerance was predetermined and incorporated in his plan. Tom probably won’t be around the next day because he did not have a plan, any form of money management, no risk tolerance set up and no trend identity to time his entries and exits. The chances of success are much greater if your effort and time is spent on your approach to the markets and developing a good workable plan that is right for you!
If you fail to plan, you are planning to fail.
What’s your plan?