One of the most common bits of advice novice traders get is to simply copy someone else’s plan that they have used successfully until they gain a sufficient body of experience to construct their own investment plan.
Plans aren’t hard to find. If you own any books on investing, you’ve probably got access to several dozen of them right now. The problem though, is that however well-intended the advice, that’s usually a terrible idea.
Almost invariably, simply copying and pasting someone else’s proven plan into your own life will yield disappointing results. There are a number of reasons why this is the case, including:
• The difference between your ability, education and experience and those of the person who developed the plan
• The difference between your attitude and tolerance for risk and that of the person who developed the plan
• The amount of time you can devote to trading, versus the amount of time the developer of the plan devotes to trading
• Differences between your own psychological make up and degree of self-difference and those things of the person who developed the plan
• Differences between your own personal willingness to stick to the trading plan, even after a string of losing trades, versus the willingness of the person who drafted the plan to do so
And so on.
You see the common thread here. You are not the person who developed the plan, and because of your uniqueness, in the overwhelming majority of cases, the plan just isn’t going to “fit you” as well as a plan of your own making would. It would be like trying to wear someone else’s shoes or underwear.
This is certainly not to say that you can’t use other people’s plans to help guide you in crafting one that’s specifically tailored for you – that’s actually an excellent way to use existing plans. Just don’t wholesale copy and paste someone else’s plan into your own life and investing strategy and expect to get stellar results. You won’t.
While there’s no way we can tell you what your plan should look like (only you can do that), we can outline in broad terms what types of things your plan should address and account for. Fundamentally then, the beginning point of your strategy is analysis, because that’s what will help you determine if a trade is even worth making.
Once you HAVE identified a viable opportunity, your plan needs to include both an entry and an exit strategy. A complete plan will have contingencies in place that cover the following possible outcomes:
1) The price moves favorably (in the direction your analysis said it would)
2) The price moves unfavorably (opposite the direction your analysis said it would)
3) The price remains unchanged
One of the most common mistakes that beginning investors make is a failure to have a viable exit strategy. Note that your exit strategy needs to encompass all three of the scenarios above. When to take profits, when to cut your losses and how to gracefully exit from a trade that’s just not going anywhere.
If your plan is supported by sound analysis, and you have a viable entry and exit strategy, and you keep the other points we’ve talked about in this and the previous section in mind, you will be able to craft a plan that works FOR YOU, and at the end of the day, isn’t that what it’s all about?