The first step in developing your trading plan is to decide on your personal trading strategy. It really is your very own strategy, because it is heavily dependant on your personal psychology, your make-up, what makes you tick. The reason that there is no such thing as the ?Holy Grail? of trading is that everyone is different, so each successful trader has his or her own Holy Grail which is different from everybody else?s. However, each person who has developed a trading strategy has had to make the following decisions:
? Which instruments will I trade, e.g. stocks, options, bonds, forex, futures? We are hoping you have decided you will invest in stocks, because if you?ve chosen anything else this article is not for you!
? Which market or markets will I trade, e.g. NYSE, NASDAQ, FTSE, DAX?
? How much time can I devote to trading each day?
? How will I select what to buy?
? How will I know when to buy?
? How long do I intend to hold?
The answer to these questions will determine what type of trader you are, and this will form the bedrock for your trading plan.
So we have decided we will invest in stocks. Will we stick to our local market, or do we want to consider investing in major markets overseas, or even emerging markets? If you are a beginner, we would advise doing the learning at home before venturing overseas. Next, we would normally want to specify the size of company we would invest in, i.e. just large cap members of the Dow or perhaps smaller cap members of the Russell 2000?
Now that we have defined our universe of stocks available for selection, we need to consider how we will select which one(s) to buy. There are two main methods:
? Fundamental analysis
? Technical analysis
Fundamentalists hold the idea that it is possible to put a value on the current worth of the company, and they will look for companies that are currently undervalued by the market. This necessitates a high degree of proficiency in reading and interpreting company financials and press releases. If you have those skills, this can be a very profitable strategy, as evidenced by the greatest living fundamentalist Warren Buffet.
Technicians believe that everything we need to know about the company is already in the price, and they use the price series to select stocks with a high probability of favorable moves. Once you have mastered how to interpret the various technical indicators, this can be the less time-intensive method, as there is a good deal of charting software, paid and free, available to automate the task of selecting target stocks.
Your choice of path between fundamental and technical will answer both the ?what to buy? and ?when to buy? questions. The last decision you have to make is how long you intend to hold your stocks. A major factor is how much time you have available each day to devote to stock trading. If you have a full-time job, you are going to find it very difficult to become a successful day-trader! Other than that consideration, the most important factor is your psychological make-up. Some people crave action, and would find a long-term trend following system too slow, too boring, while others would find short-term trading too time-consuming and stressful.
If you are beginning investing, it may be difficult to make some of these choices with no experience, but they are critically important. You could perhaps consider testing different styles by paper trading before you risk your capital.
Tags: Beginning, Decide, Investing, Personal, Strategy, Success, Trading
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