There’s little doubt that picking good stocks is a major factor influencing your success as an investor. However, far too many investors and traders think that, once they identify a particular name that they feel has the potential to be a winner, their work is done. Certainly, the investors who bought Apple or Amazon in the late-90s and have sat on their holdings (or continued to buy regularly over the past couple of decades) have made out like proverbial bandits, but that is, unfortunately, the exception and not the rule. For the rest of us, stock picking is only the first step. True success and exceptional returns are, ultimately, determined by how well you manage your trades. Being able to amplify the gains from trades that move in your direction while containing the losses on the trades that don’t will have a far greater influence on your eventual success than anything else. 

If you ask any trader if it’s a good idea to have a plan when they enter a trade, they’ll respond in the affirmative exactly 100% of the time. Unfortunately, a much smaller percentage actually go to the trouble of formulating a strategy, and far (far) fewer stick with a plan when they do have one. Learning the discipline required to create a plan for every single trade you take and then sticking to that plan is one of the most difficult things to do in trading, and it gets even harder when that plan is vague, doesn’t factor in potential catalysts, and doesn’t have room for adjustments based on any new information that may come down the pike. 

Accordingly, there are two critical elements to every trading plan. The first is the plan for entering the trade, and the second is a plan for exiting. In other words, it’s a way for you to implement the basic market aphorism, “Cut your losers quickly and let your winners run”. There’s an infinite number ways to accomplish that, and the goal is to find a system that works for you and your own personal circumstances. 

A plan could simply be to make a single buy, set a stop, and figure out some sort of level where you want to sell (if and when it gets there!). Hopefully, the stop will be tight enough to stave off a large loss (but loose enough to give the trade some room to work), and the exit point will allow for sizable gains. Just doing something like this is probably more of a plan than what the majority of traders ever develop, but it’s when you build on those basics that you move on to the next level as a trader.

For me, my trading plans all center around partial buys and partial sells. I enter every trade with small “nibbles” as I begin to watch a stock and learn how it moves, and then I start to increase my size my confidence builds and favorable conditions develop. I may make a dozen or more small buys as I build my position and begin to increase size.

From there, risk management becomes increasingly important. To accomplish this, I’ll use varying time frames for different parts of the trade and am liberal with the use of the sell button in order to shed risk temporarily. Watching, waiting, and constantly repositioning are the keys to this trading methodology. I want to always be ready to make a big move when I feel that conditions are at their most favorable.

Exits are, of course, what makes or breaks the trade, and the decision of when and where to sell tends to be the most difficult piece of the puzzle to get right. Again, my methodology is incremental. If I happen to catch a good move, I’ll move quickly to lock in partial gains, while giving room to the rest in case the momentum continues to build. Overall market conditions will impact the decision-making process, and it’s important to remember that your most powerful tool as a trader will always, always, always be your sell button. There is a direct correlation between a trader’s success and their comfort with selling.

How much capital you have will also influence your trading plan. When I first started trading, I had limited capital, so my current incremental approach wasn’t a viable option… especially since we still had trade commissions to go along with our 300 baud dial-up modems! I had much shorter time frames and would keep extremely tight stops, as I simply couldn’t afford for my capital to be depleted. However, one mistake I see newer traders repeat again and again is to buy a stock and then just let it sit there. Too many times, a gain can easily turn into a loss… or worse, they won’t cut a losing stock and watch as it continues to drag down their entire account. It’s at that point where they get impatient and start compounding their mistakes by making impulsive trades. 

There’s much more to developing good trading plans and managing your risk, but the first step is to simply start planning out every trade. Take a few minutes to determine your goal for the trade and what you’ll do if it doesn’t (or does!) work. Simply being aware that a trade might not work is more of a plan than many traders ever have.