Trading and investing is better suited if treated like a business. Any venture should have a clear and defined plan which outlines their strengths, hurdles, goals, time commitment, and what the
end game might be. Creating systems to define success and evaluate their progress over time is imperative.
Step #1: Identify your strengths, weaknesses, and personality traits. Write down what you are good and what you are not good at. This allows you to identify areas to improve and a tracking system to improve. Some common weaknesses include impulsiveness, focus, and willingness to be wrong. Identify habits that make you make/lose money. What are the systems your going to put into place to overcome these hurdles? There are three separate learning styles: auditory, visual, and kinesthetic. Identifying which one you are is imperative for improving your trading/investing.
Step #2: Create a mission statement and identify trading goals bigger than yourself. You need a purpose, do not trade because you are bored or wait out a trade because you are bored. Identify your mission statement and purpose behind why you are trading, this will help you build out your goals than yourself. Think about Apple’s Mission Statement, “To create groundbreaking technology products that change consumer habits”. You are more likely to commit the time and effort if you have a goal that is larger than yourself.
After identifying your mission statement, identify trading goals based on your day-trades or swing trades. Smaller targets, and slowly increasing your position size is a way towards greater profitability.
Step #4: Mastery of few: stick with the same asset class until you master or have 20-30 profitable trades using the same strategy. Drive consistency first to drive profitability. Set up standards for your day trading, swing trading and retirement accounts. Split into separate accounts in order to encourage compartmentalization. What are the risk components for each account and how can you learn from trading in each of them?
Step #5: Establish your daily routine and create office hours. Make each trade robotic, you should not be happy or sad with each trade. Set a daily routine and set time aside for learning and educating yourself. If you took a business and did not analyze what the business does well and what it doesn’t the business will not survive long-term. Define trading times of the week till you get to where you want to put, assign topics and time for further development and learning.
Step #6: Understanding money management, risk management, and R/R multiples. Bigger time frames tend to hold stronger than shorter ones. What’s your entry price, what is your stop loss, what is your target? Must be defined prior to entry and then all should be conditionally placed with each trade. Establish R/R multiples greater than 2:1 unless your batting average is greater than 50%. Consider position sizing relative to the total account value: a .25% to .5% for day trading, 1% for swing trading, 2% for position trading. This affords you more trades while building out your business plan to foster and grow your understanding of your strategy. Create a system you are consistent with.
Step #7: Always use stop losses, cut your losers and let your winners run. Remove the self-destructive behavior of not putting stop losses in. Knowing your batting average for each multiple of risk, smaller more consistent targets is the key. Never risk more than a certain percentage for the entire account with multiple positions. You should pre-set a limit in your business plan for your maximum portfolio risk.
Set up an account size, max risk per trade, max daily, weekly and monthly loss allotted on paper and stick to it. Create a system of accountability and a punishment if you do not follow your trade plan.
Step #8: Focus on a trade strategy that suits your style and personality. Regardless of what strategy you choose, understand the tools that you use and how these impact your thesis. Define in significant detail in your trading and business plan so it can be consistently repeated. Create a checklist for each and every trade to create quantifiable repeatable results.
Step #9: Perform a review process on your trades. The trade journal requires each trader to learn about each and every trade they place. Learn a lesson from each trade, why did you place the trade, why did you exit the trade and what would you do differently. No new transactions until you have reflected on the one you just completed.
Step #10: Education plan How are you going to grow in your knowledge and mastery of trading? It takes 10,000 hours to master something so you must set aside time to learn, approach it bite by bite and take each step and reflect every time. Regular repetition creates profitability, and connects with those who know more than you. Let the data be your guide, if you follow your checklist the data will tell you what works and what doesn’t.