www.wealthwithin.com.au
Looking to achieve financial independence? Good investing requires good planning. In his money management series, Dale Gillham is giving Rescu. readers advice on how to handle their investments – now and in the future.
There is an old saying when it comes to investing, and that is ‘if you fail to plan you plan to fail’.
This statement is especially true when it comes to investing in the share market. Many who enter the market jump in head first without a plan, other than the idea that they want to make money. Rather than being wise investors they effectively become gamblers.
Prior to the GFC, many people felt they were better off leaving investing decisions to someone else. Now, in the wake of the heavy losses, more are looking for a better way. I am sure that, armed with the right knowledge and a plan, anyone can take control of their financial future.
In this series I have shared with you investing truths to assist you in getting started on your investment journey. Now, here are my top tips on how to create your very own investment or trading plan.
What is a trading plan?
A trading plan is a written strategy that helps you identify why you are investing, what you want to accomplish and how you will do it. If used every time you invest it will assist you to formalise your thoughts and focus on what you want rather than what you don’t want.
Three Important Steps Before Writing Your Plan:
- Gain at least a basic understanding of Fundamental and Technical analysis. Previously we gave you an introduction to these areas.
- Develop a written process that you can follow to assist you in making decisions. You need to know how and why you will enter a stock, how to take a profit and how to manage risk.
- Decide how to keep track of your investment decisions. Your documentation will include your trading plan, contract notes that are sent to you when you buy and sell shares, and dividend statements you receive.
Creating and using a trading plan will put you in the top 10% of people currently trading the share market. Once you have completed the above steps you are now ready to build your plan.
Elements Of A Trading Plan:
- Investment Time Frame – choose an appropriate time frame for your trading to suit your lifestyle. Short, Medium or Long term?
- Risk Level – deciding on your risk level will establish how much money you intend to invest and the risks you are willing to take. Is your risk tolerance low, medium or high?
- Market to trade – deciding on your time frame and the risk level you are willing to take will determine the appropriate markets to invest in. Blue Chip shares are considered low to medium risk, whereas Futures, Contracts for Difference and Currencies are high risk.
- Money Management – document your answers to the following:
- How much will you put into any one trade? For shares, do not put more than 20% of your total funds in any one company. I suggest between 8% and 12% of your total capital in any one share.
- How many different positions will you have? I suggest between 8 and 12 shares in a portfolio.
- Where will you set a stop loss or exit point if price falls after purchase? I suggest you plan to exit if price falls more than 15% below your purchase price.
- Your trading plan needs to include your rules to buy and sell. These rules will come from your study of Fundamental and Technical analysis as mentioned above.
The final step
Finally, it is imperative that you test your trading plan to ensure it works for you. This is done by paper trading, which means you go through the process of buying and selling without actually placing money into the market through a broker.
Most traders tend not to have a plan or they simply fail to test it. The result is that they often do not have enough money to survive long enough in the market to gain experience.
Regardless of what the financial industry tells you, investing for yourself is not difficult. You just need to know how. Remember, from knowledge you gain understanding, and from understanding you gain experience, all of which reduces your risk level and achieves more profit.
To find out more on how to be successful in the share market visit our website to listen to the free podcast ‘The three P’s to being a share trader’
https://www.wealthwithin.com.au/education/trading-room/wealth-radio-episode/409
In my next article I will discuss corporate actions like floats, takeovers, dividends and what happens when a company goes into a trading halt.
Dale Gillham is the director and founder of Wealth Within, an Australian-based company specialising in independent investment advice and share market education.
He is also author of the book ‘How to Beat the Managed Funds by 20%’ and regularly holds seminars around Australia. Dale can be contacted at info@wealthwithin.com.au
