In the world of investments, there is an old adage that rings true: “Fail to plan and you plan to fail.” Every successful trader will agree that these eight words are a motto that you can’t afford to ignore. If you want to turn a profit, then you need to put a well-honed and carefully researched strategy in place.
But just how do you go about doing this? Here are a few tips to bear in mind.
Set a Risk Level
Before you place trades, it’s important to have a plan in place to inform your decisions. Part of this plan should specify how much you’re willing to risk on any one trade. As a rule of thumb, this figure should not exceed 5 per cent. This is the amount that you can afford to lose over the course of 24 hours, and once it’s gone, it’s a good idea to stop trading for the day before you end up losing it all.
Before you embark on any trades, set a realistic profit target and risk/reward ratio for your portfolio. Consider what the minimum risk/reward you’re willing to accept is. If we were going to suggest a ballpark figure, then a good plan is to only execute trades where your potential profit is around three times greater than the risk posed. If your stop loss was $2 per share, this means that your goal would be to obtain $6 profit. These goals should be reassessed every week or so.
Set Exit Rules
Trading successfully is not only about looking out for buy signals, but also planning when and where to exit. Many traders are reluctant to sell when they’re done, as they’re unwilling to accept a loss. If you can’t overcome this attitude and accept that things will go wrong sometimes, then you’ll never make it as a trader. If your stop gets hit, you were wrong. Accept this and get out before it turns nasty. You should already have strategies in place for this before disaster strikes. There should be at least two of these for every trade: a written stop loss for if the trade goes against you, and a profit target. Once you reach the latter, aim to sell a portion of your position, and then re-evaluate the stop loss for the remainder.
Set Entry Rules
It may seem strange to see entry rules explored after exit rules, but this is because the latter is by far the more important of the two. However, this doesn’t negate the fundamentality of the former. Entry rules must be carefully formulated, so that they’re simple enough to facilitate rapid decisions, but complicated enough to deliver success. It’s often best to find a broker like Oanda, who can provide you with platforms capable of making decisions on whether conditions have been met, as opposed to doing it yourself. This is because computers won’t be affected by emotion or trepidation, nor will they continue to over optimistically risk a position once a trade is going the wrong way.
Follow these simple tips to help you develop a trading plan that will turn a profit.