Thursday, December 25, 2008

Why a Plan is Pertinent

No matter what type of market you may be in, you need a plan. It should outline how your actions should develop within the market. The stronger your plan, the more likely you will be able to maximize gains and limit losses.

If you jump into a stock with no outline describing where to purchase and where to sell, you will likely find yourself in a less than desirable situation. You want to have set arrangements in order to increase your odds of coming in and out of stocks with an overall gain. You need to have an outline, whether on paper or in your mind, that tells you not to buy when the price is overextended and volume is decreasing, or to tell you to sell when the price falls beneath a set support level.

If you have a diagram of your trade you will be able to get in and out of a trade a predefined level—a level you determined while you were, hopefully, rational and not overly emotional. The plan should limit the effects of wishful thinking, superstition, poor judgment, emotional irrationalities, and other less than desirous obstacles.

This is not to say that your plan should be so rigid that you find yourself acting as a voodoo prognosticator. You do not know how the stock will rise or fall, or if it will do both or neither. But the idea is that you have a plan in place to deal with the fluctuations, so you find yourself holding, selling, or buying at opportune times determined by reason and more thought than you can devote while action is taking place.

You can change your plan mid-way through. Perhaps you did not take something into consideration, or maybe you have to leave the computer for the rest of the day; change your plans, but make sure you do it in as sober a state of mind as you can summon. Cut the hope; cut the gastro-intestinal premonitions; cut the crap, and increase your odds.

No one wins all the time, and no one wins on hope alone either. With a plan you will have something in place to protect your capital and to guide your decisions as you progress in the world of stocks, options and forex.

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