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The Business of Trading Financial Markets
Trading Success Requires a Personal Philosophy and a Trading Plan
Jan 20, 2009 © Harry P. Schlanger
A stock trader obviously needs basic trading skills, however; most of all, a well documented
trading plan listing trading style, strategies, tactics and money management.
Every financial market trader should ask, "Where do I want to be when I am finished with trading?"
This is the same question every business owner should ask. A trading business may be the vehicle used
to get to a specific destination, but a vision provides the real purpose -- making money in the markets.
The next question ought to be, "What can I do to ensure my trading helps me achieve my goals?"
Thinking about a set of actions, one should then articulate what are the goals and objectives.
This article summarizes some basic market trading knowledge and skills needed, and outlines a specific
individual plan required to help achieve the desired objectives and success in trading markets.
Trading Market Skills
Trading stocks and equities is a business - buying or selling financial instruments, such as stocks,
commodities, currencies, etc., with the intention of making a profit. There is a perception that trading
is an easy way to wealth, but the reverse is true. Trading is hard work and requires:
- Understanding of how markets work
- Business planning for success
- Constant study of changing market conditions
- Basic skills in technical analysis
- Discipline and decision-making
Each trader is totally responsible for obtaining the above skills, staying up-to-date with information
and for making any trading decisions.
Why Traders Lose Money
For the majority of traders, making money does not become a reality. Most new traders lose money as
they fail to prepare for trading and use sound money management techniques. These techniques are not
hard to understand, but for some, difficult to implement. Psychological barriers cause some traders to
hold on to stocks when they should be selling and likewise, sell stocks when they should be holding.
Traders who succeed are able to recognize and overcome psychological obstacles with motivation,
discipline and implementation of a sound plan. They understand that the first objective is to protect
capital and they focus on activities to limit losses.
The Trading Plan
A trading plan is the blueprint for future trading. It should be recorded in the form of a personal
rule book for reference and contain decisions about:
- Trading instruments: Stocks, securities, futures, options, warrants
- Markets to trade: Share sectors, commodities, currencies, etc.
- The trading timeframe. Day trading, intra-day, weekly, monthly
- Trading frequency: How frequently to trade
- Size of portfolio: Define starting capital in the portfolio
- Risk and profit objectives: Define risk levels and money management
- Trading tools: Online charting, technical analysis, fundamental analysis, etc.
In addition, the plan must have a trading system, which states criteria for individual trades:
- Money allocated to individual trades
- Entry conditions that must be met before a trade is initiated
- Exit conditions based on price or size of stops
The plan should reflect personal trading philosophy, containing money management rules and trading rules.
What works for one trader may not work for another. The only way to be successful is to develop a trading
strategy based on sound risk and money management principles that "fits" the trader's personality.
Trading is risky and can result in the destruction of hard-earned capital. However, with hard work,
discipline and a well-defined trading plan, which includes money management, it is possible to succeed
and obtain a comfortable living from trading in financial markets.
References:
- "Trading With a Plan", Tony Compton, Eric Kendall, Wrightbooks P/L, Elsternwick, Australia, 2000.
- "Trade Your Way to Financial Freedom", Van K Tharp, McGraw-Hill, NY, 1999
The copyright of the article Introduction to Financial Derivatives is owned by
Harry P. Schlanger. Permission to republish in print or online must be granted by the author in writing.
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