People that know me, know I love to trade stocks and options. One of the hardest (and sometimes costly) lessons to learn about trading is to plan the trade and harder yet, trade the plan. The first part of planning the trade is easy. How else do you know what to trade? My process goes as follows:
- I review my watch list and pick a stock that appears to be in a good trading range.
- Review the chart and pick a direction
- Review the quotes and decide on a strategy that increases my probability of success, while allowing room to be wrong.
- Pick both positive and negative exit points
- Finally, place the trade
That would seem to be the hardest part. Now all I need to do is trade the plan. When I first began trading this was the hardest part. Once the stock started moving in the wrong direction emotion took over and my well thought out plan didn’t matter anymore. I would make a trading decision based on emotion. Only to find later my original plan would have worked out in the end.
The same thing can be said in business. Almost all businesses develop a strategic and financial plan. However once the year starts, and things don’t go exactly as planned owners and employees begin making decisions based on emotions versus sticking with their well thought out plan. A well thought out plan should have contingencies (exit points) built in to avoid the pitfalls of decisions based on emotions. In addition, it will give employees confidence in ownership and management, demonstrating they understand the business and things are still headed in the right direction. That confidence will translate to the plan and ensure going forward everyone trades the plan.