Overcome Not Having A Crystal Ball Through Planning

Often people believe that if they do their research and select the right shares they have conquered the game of share market investing. However putting in the effort of selecting the right shares is only half the story.

After you have identified which shares will give you the best chance of succeeding then you need to create a trading plan so you know what you will do IF the share moves in a particular direction. Why the big IF, as hard as it is to take none of us have a crystal ball – but we can compensate for this through planning.

Every trading plan should be made up of several components. An overarching strategy or plan should be in place so that it doesn't matter if the share moves up down or sideways you will always know what course of action you need to take. Think about this for a second, if you have a set course of action to take regardless of what happens with the share the fear or trepidation that you may have felt before will be gone.

As a consequence of this strategy you should know where you want to place your order, risk and target prices. It is very important that these levels are realistic and not just made up to make your investment seem worthwhile. Having these levels set cuts out a lot of the emotion that you'll experience while in the markets and prevents you from committing the cardinal sins of share market investing.

Next you should ensure that you are making a worthwhile trade ie is the amount that you're risking on the trade worth the return that you could potentially gain from it? Generally a ratio of 1:3 should be sought. In other words if in a particular plan you stand to make $3000 if the share price goes up you should not be willing to risk more that $1000 if the share price goes down, so for every dollar that you are risking you should be looking to make three.

Finally you should decide how much money you actually want to use in any one trade, the best course of action here is to ensure that you are using a similar amount across your portfolio and that you are buying shares based on dollar value rather than a set amount of shares each time. This is purely to ensure that you maintain a balanced portfolio.

For example if you decided to buy 1000 shares with each trade and one stock is $30 and another is $3 then your portfolio will be out of balance as you will have $30000 in one stock and $3000 in another.

In general this type of trading plan is sufficient for an investment approach. However the more information that you include in your trading plan the better. And most importantly don’t forget to track the results that your plans are producing, you will only be able to gauge your success in hindsight so you must know why you decided to take a particular course of action.

About the Author

Phil Wengier, VIC, Australia

More details about Successful Investing can be found here . Phil Wengier has been successfully investing in financial markets for over 30 years and is the owner of several companies. In particular, Saratoga Pty Ltd has been on the Internet since 1996 helping many who wish to discover how to invest safely and successfully. If you would like to subscribe to my Savvy Investor newsletter please click here