The three T's to becoming a speculator: trading plan, trade worksheet, and trading journal. Without a doubt, if you want to develop trading into an avocation or you want to improve your demo trading, or you wish to trade for a living, you cannot ignore either of these three tools. This particularly goes for your demo-, paper-, or test-trading account. Utilizing these three tools effectively makes your day-to-day trading go a lot smoother.
First Tool: The Trading Plan
You want to ask yourself as many questions as possible when developing a trading plan. Here are five quick questions to begin your trading plan.
The first question you have to ask yourself is: What markets do I want to trade?
How you answer this question will ultimately determine your longevity in trading. There are many factors that determine which markets are best suited for you. Do you want to trade very volatile markets or low-volatility markets? Do you live on the West Coast where it's difficult to see the 5AM opening bell for some markets? Do you travel a lot and you can't stare at your screen all day long? The market or markets you pick to trade should best suit your lifestyle.
It is also best to pick only two to three markets that you sincerely want to trade. It is difficult to understand and trade the subtleties of every single market available. While technical analysis can be applied across the board, as a specialist, you begin to understand what actually makes a particular market tick. You can then manage your money and your trades according to the rhythms in that market. By focusing on a handful of markets, you can become a specialist. Without a doubt specialist in any field tend to fare better.
The second question you have to ask yourself is: What am I trading for?
Knowing why you are trading stocks, futures, forex, and options is imperative. Is it for fun, like a gambler, or is it a true desire to speculate? Or are you trying to "hedge" your overall investment portfolio? What many investors forget about trading markets like futures and forex is that there are two aspects to it. It can be both the riskiest investment and the least risky investment at the same time, if you use it properly.
For example, during the dot-com bubble, many investors had mutual funds and stocks that closely matched the Nasdaq 100. When the market began to slow down and investors found themselves in the precarious position of not knowing if they should liquidate their tech stock and investment portfolios, they could have simply used Nasdaq futures to protect themselves from any quick drops in value.
By looking at futures from both sides, speculating and hedging, you can come up with more versatile strategies of managing your money over the long haul.
This leads us to questions three through five: What am I hedging against/for?, How many contracts would it take to accurately hedge part of my portfolio?, and How many contracts would it take to accurately hedge my entire entire portfolio?
These questions are designed to get you to think outside the box as a trader. Look at how your current investments are linked to interest rate fluctuations, the S&P 500, or the Dow Jones Industrial Average. Calculate how much you stand to lose when these markets move against you, and from there you can figure out how best to hedge yourself. None of these markets operate in a vacuum; there are ways for you to protect yourself from stock market adversity if you open your eyes to the hedging side of futures and forex investing.
Second Tool The Trade Worksheet:
The trade worksheet is designed to break down the numbers of any trade you are planning to execute before you enter it. It is designed to ask some fundamental questions. Once these questions are answered, you can see in black and white what the potential profit is, what the potential loss is, and if the trade is worth taking at all.
The vital information that it gathers is:
Entry price
Profit exit price
Loss exit price
Margin level
+/-% return on margin
+/-% return on account
Cost of option
A notebook that you can write in on a consistent basis will suffice. The goal is to get you used to doing the numbers.Keep track of the trades you entered and exited throughout the day. Tally up your profits and losses and how much you risked attaining your results. The information just may be the food for thought you need to help you make better choices during your trading experience.
Third Tool The Trading Journal
It's been said that you don't know where you are going unless you know where you have been. The trading journal does just that. Throughout your trading career, you will have multiple journals. In fact, you should do your best to never stop journaling when you are a trader.
If you cannot, a great alternative is to journal in 20-day trading cycles at a time. By journaling your trades, you will be able to understand why you do the things you do and when you do them. If they are good habits, keep them; if they are bad habits, do your best to modify them to help you succeed.
The typical trading journal should have the following:
A copy of your trading plan, so you can constantly refer back to it.
At least 20 trade worksheet forms, complete one for every trade you execute.
A copy of the entry chart of every trade you execute, a long with a small three- to five-sentence synopsis on why and how you entered the trade, including your feelings and emotions at the time.
A copy of the exit chart of every trade you execute, along with a small three- to five-sentence synopsis of the profits or losses and why and how you exited the trade, along with your feelings and emotions at the time.
By consistently documenting your experiences, you will become an expert at knowing how fear and greed wreak havoc on your decision-making process.
Building confidence isn't easy when it comes to perfecting how you speculate in the markets. They say that in order for a new activity to become a habit, you have to do it 30 times consistently. Trading is no different. Avoiding the top 10 mistakes of trading, putting together a trading plan, working with a trade worksheet, and utilizing a journal are all activities that have to be done consistently in order to build confidence. While your confidence boost won't happen overnight, one day you will wake up and find yourself skilled and confident.
