The importance of planning your trade

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Big trouble can arise when you trade stock. The biggest problem of all is your emotions. You’re not alone, all people have emotions, and many people have trouble controlling theirs, especially when they’re risking capital. No one likes to lose money, so sometimes the fear of losing prevents people from making gains, or even causes them to lose. But there are a few ways you can deal with your human tendency to panic when a stock is moving either up or down.

The most important thing for you to do is have a clear cut plan for your trade. It can be as simple as, you’re buying XYZ for $40 per share. If the stock drops 8% you automatically sell with a stop-loss. If the stock hits $50 (your target price), you go ahead and sell. This means you have set very specific paramters for your trade.

You have:

1) A downside limited to 8% due to your stop-loss
2) An upside return of 25%.

If your timeline is accurate, and you can achieve your 25% return quickly, then this trade becomes an almost perfect scenario.  If the trade goes against you, you are automatically stopped out, taking an 8% loss, which lets you live to fight another day.  If you haven’t made a plan for the trade, you run a great risk of trying to wing it.  In other words, you’ll fly by the seat of your pants and react to what’s going on with the stock.  A rational and calm trader merely sticks to the plan and executes.  If you learn early on to bring disciplined behavior to your trading, you’ll far exceed the results of the mass of investors who don’t.

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