(an excerpt from the book UP! by Ann Babiarz ©2017 all rights reserved)
An investing plan is a complete set of rules that covers every aspect of your trading and investing life. Many amateur traders and investors do not have any sort of plan and they enter the markets with little regard to their risk and profit objectives. Comprehensive risk and money management strategies lie at the heart of all good investing plans. From a good investing plan comes solid fine-tuned habits. Keep in mind, bad habits are easy to create and difficult to live with. Good habits are difficult to create and easy to live with. A solid investing plan will help you create and sustain good habits.
Traders and investors with a plan have the ability to monitor their performance by evaluating their progress continually, day-by-day, and in a way that is objective and comprehensive. This enables them to invest without emotion and with minimal stress. Conversely, the trader or investor without a plan is not able to do this and tends to rely purely upon gut feeling (although you should pay attention to your intuition), hunches and tips. For them, trading is a nail biting, emotional roller coaster ride of stress that, inevitably, results in financial loss.
Obviously, a plan does not guarantee success; that would be too simple. If that were the case, every investor would have one, and we know that is not the case. However, a good plan that is adhered to strictly will help to minimize losses and enable you to stay in the game successfully and a lot longer than traders and investors who do not have a plan.
Moreover, a plan cannot predict the future; however it can help you stay on track when facing possible outcomes and responding instead of reacting. This is why a plan is essential. It is a list of strategic responses to events beyond your control. You control the only thing you can — yourself.
Some confusion exists over the difference between an investing/trading plan and a trading strategy. As stated above, the former is a complete set of rules that governs every aspect of your investing and trading life. It goes into great detail and may, for example, address the amount of time devoted to reading, research and other investing or trading activities. The term “trading strategy” tends to be used to describe trade entry and exit criteria. These are merely elements of an overall investing plan. For example, it is perfectly feasible, desirable even, to include two or more trading strategies within one overall trading plan.
Unless you have been a consistently profitable investor over a sufficient length of time to encompass a number of different market conditions, or you have someone else manage your money, then YOU need an investing plan! Even if you have already achieved this or have that person on board, this may still prove useful as a “refresher” course or indeed open your eyes to new aspects of trading and investing that can improve your profitability.
An investing plan is a roadmap. It is quite literally the route that will take you from where you are now to where you want to be which, for most traders and investors, is consistent profitability. To begin investing without a clear idea of where you are going, and how you are going to get there will almost certainly result in increased stress, sleepless nights financial loss – or all three.
An investing plan will make the act of trading simpler than it would be if you invested without one. It will limit your opportunity to make bad trades and it will prevent many psychological issues from taking root. It will also help you to achieve these things because wherever you are on your trading and investing journey, it will not only act as a roadmap, but also locate your position. Most importantly, if your investing isn’t going so well, you will know it is due to one of two possibilities: either something in the plan is not working or you are not adhering to the plan. If the plan is a good one and it is back tested and paper traded, (or forward tested with a very small amount of money) then the fault is likely to be found in the latter of the two options.
If you are losing money while investing without a plan, it is virtually impossible to distinguish what you are doing right from what you are doing wrong. You have no way to evaluate your results; therefore the likelihood of being able to diagnose the fault and correct it is small and could take forever. Again, an investing plan is your personal GPS device to locate your position and if you have made a wrong turn. It provides the means to identify where you went wrong and how to get back on track. You are able to continually evaluate your results and, more importantly – your discipline – in a manner that is objective and comprehensive. This is extremely difficult to do if you do not have one.
Your plan should take away much of the decision making in the heat of the moment. Emotional issues will become very powerful when real money is on the line and, as likely as not, force you into making irrational decisions. With the correct plan, your every action should be spelled out, so that in the heat of the moment you do not have to make any decisions. You simply follow what the plan stipulates.
I hope you are now totally sold on the merits of having a detailed and clearly laid out investing plan. In case you are still in need of convincing, here are the key benefits:
- Relaxed, stress-free investing that is simpler with a plan than without one,
- Ability to monitor your progress, diagnose faults and amend your plan accordingly,
• Prevent many psychological issues from taking root, - Strict adherence that will reduce the number of bad trades,
- Help in preventing irrational decisions in the heat of the moment, enabling you to control the only thing you can – yourself.
Professional traders/investors are highly disciplined. A plan together with the other resources available to you through the Ann Babiarz & Associates, LLC Finance and Investing Mastermind Group will:
- instill a large measure of discipline into your investing
- allow you to discern the difference between trading/investing and gambling. Gamblers tend to lack both discipline and a plan
- Enable you to invest outside of your comfort zone. How many times have you let a loss run and cut a profit short because it was the comfortable thing to do? A plan, executed with discipline, will help prevent this from happening.
Your plan is your roadmap enabling you to get from wherever you are now to wherever you want to be – i.e., consistent profitability. It also enables you to connect your goals and dreams by challenging you to question your beliefs and values. If you do take a ‘wrong turn’ on your roadmap, you will know about it very quickly and have the opportunity to correct the problem before losses spiral out of control.
Before you start to create your own investing plan, here are a few pointers to help ensure that you build the best plan possible.
“Money is power: so said one.
Money is a cushion: so said another.
Money is the root of all evil: so still said another.
Money means freedom: so runs an old saying.
And money is all of these—and more.
Money pays for whatever you want—if you have the money.
Money buys everything except love, personality, freedom, immortality, silence, peace.
—“The People, Yes” (1936) Carl Sandburg
Why do you want to trade and/or invest?Make money from the comfort of your home! Be your own boss! Beat the market! Build real wealth!
It’s tempting, isn’t it? One of the many valuable questions to ask yourself is whether you have the intestinal fortitude to face the market every morning or on those days in which you want to engage in your trading and investing.
Why trade? “To make money” is a generic answer that is applicable to all traders and investors. You would be a rare individual if you traded securities with a goal of losing money! But “making money” is not personal nor specific and therefore, it is not helpful to your plan. It’s not measurable in time or dollars and thus is useless as a goal. Investing is a business and as such requires attainable and reasonable goals that can be tracked. Moreover, trading demands that you possess the right temperament; It can make a difference in your life and the lives of those around you. That difference can bring satisfaction or misery.
Begin by asking yourself whether this is something you will enjoy doing. If it isn’t, stop right here, get a job and let someone else handle your money for you. Think about it: you might enjoy a bagel from time to time, but chances are that you would not dream of purchasing a Panera franchise. Why become a trader or investor if you’ll wake up every morning dreading your day?
Maybe you have seen pit traders on Bloomberg TV or CNBC and thought to yourself, “I’d love to be that passionate about what I do.” If so, you may have a need for excitement. Ordinarily, such a desire is an admirable one but, in the markets, it could easily lead to catastrophe if allowed to go unchecked. Unbridled enthusiasm can lead to emotional decision-making, a disaster in the world of securities.
Perhaps you have heard stories about traders making tens of thousands of dollars in a single day? Some do, but they are only a small fraction of the minority of traders who, so it is alleged, make any money at all in the markets.Crushing disappointment is often the reward for rampant greed. Pie in the sky fantasies about trading via a laptop while aboard a luxury yacht, as you sip champagne cruising around the Bahamas, are great fun, but they are hardly grounded in reality. Such dalliances may help to motivate you to study the markets, but the emotions that accompany them will not be your friend when it comes to trading the markets. Just as the trader with a lust for excitement is doomed to fail, the fate of a trader motivated by greed is almost certain to lead to disaster.
Having these thoughts and emotions is not the problem; it is how you control them while you are trading that is at issue. A fantastic resource for mastering the market with the confidence, discipline, and necessary winning attitude is Trading in the Zone by Mark Douglas. [Douglas, Mark (2000). Trading in the Zone. Prentice Hall Press]. I highly recommend this text.
The first step in freeing yourself from the vagaries of greed and fear is to understand your own personality. A deep dive is in order.
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