Traders often say that a trading plan is one of the keys to success. Before you start trading, however, you must define realistic goals and do some honest self-evaluation in order to develop a trading plan that fits your lifestyle, your needs and your abilities. That said, here are some questions to ask yourself before you start trading.
Questions that help develop a trading plan
What’s your risk profile?
– I don’t like to take on too much risk. (You would be considered risk averse in this case.)
– I’m indifferent to risk; if the risk-reward ratio is greater than 1 to 1, I would consider the trade. (You would be risk-neutral)
– I like to take on risk, but still would consider the risks involved in the trade. (This is more of a risk-taking profile.)
When can you trade?
– I could dedicate 10 to 20 hours a week, since I have a full-time job. I’d have to trade mornings, late afternoons or on my lunch break to make it work with my day job. (You might want to only swing trade)
– I could dedicate nearly all my time to trading. (You could be a potential day trader.)
Why do you want to trade or invest?
– I want to create another source of income.
– I want to generate profits for retirement.
– I’m interested in the markets and want to make a sustainable living.
What’s your edge?
– I have a knack for dissecting financial information.
– I spot patterns easily, and could trade based off of technicals.
The bottom line
If you’re considering trading or investing, answer these questions truthfully. These aren’t the only questions you should ask yourself, but they will give you a jumpstart. Once you’ve answered these questions, it should be easier for you to determine your style of trading and the times you would trade, as well as your risk tolerance.
Keith Kern has been a full-time day-trader for 17 years; he moderates the Lightning Alerts chatroom at BiotechBreakouts.com.