Formulating a Winning Investment Strategy - Savings Report
investment strategy

Formulating a Winning Investment Strategy

Every investor needs a detailed and customized investment strategy.

Companies have a specific business plan that outlines their products/services, marketing methods, financial forecasts, and operations. Without it, they can’t function.

Potential lenders and investors will ask for it, to begin with. Moreover, company leaders need to work towards pre-established goals and a larger objective.


A business plan also acts as a guide that management can refer to. The document outlines all the particulars of daily operations, customer service processes, insurance coverage, the organizational structure, and budgeting items.

In a similar manner, investing requires a written down trading plan. Crafting it demands plenty of research and brainstorming, while implementing it is all about discipline and risk management.

This article acts as your step by step roadmap towards constructing a comprehensive and detailed investment plan. It is designed to help you create a strategy that is specifically tailored around your goals, timeline, and risk tolerance.

Without a written and elaborated trading plan, investors can easily go astray from their main whys and whats. Getting involved in the stock market without a pinned down direction is very risky.

Formulating a Winning Investment Strategy

The Plan

Your strategy document clarifies parameters like your maximum loss limit, rules for buying or selling a share, and stress management routines. They will help you become a better investor and grow on a personal level.

After having a bad day or incurring losses, the trading plan is your reference that tells you how to weather the storm and reminds you why your strategy works. 

The Risks of Not Having a Plan

In most cases, investors lose money because they fail to adhere to the plan that they set. After all, it is near impossible to remember all of the details, especially in the midst of work and familial obligations.

Without a trading plan, investors can easily find themselves in difficult situations. What happens if an unexpected event brings down the markets, such as the sell-off in late 2018?

During a crunch like this, participants have to remain emotionally and psychologically disciplined, which is no small feat. Add to that the pressure of deciding whether or not to sell shares, which investments to on to, and how to minimize risks.

A trading plan guides you through all the rules that you previously set, including your risk constraints, where your stop-loss orders are placed, and which metrics you can use to evaluate a share’s value.

Furthermore, the document includes psychological management techniques and activities that reduce the stress.

It is equally as important that you to regularly monitor your portfolio and review it on a monthly, quarterly, and/or annual basis. How often you do so and how you remind yourself of these tasks should be written down, as well.

Otherwise, the details are impossible to remember. An investor could repeat the same mistakes for years without knowing, mainly because they never took the time to evaluate their past investments’ performance.

For that matter, the trading strategy includes different ways to determine if you are improving or not and by how much.

As time goes by and you keep reviewing your portfolio, you will identify errors quickly and learn how to emulate your most successful investments.

In turn, your strategy also evolves and the trading plan must be modified accordingly.


  • Executive Summary: Just as a business has one, your Executive Summary should briefly cover what the document is about and where to find certain information in 1 to 2 pages. This will be incredibly helpful when you revisit the trading plan in the future.
  • Your Philosophy: The markets you are going invest in and specific assets that you plan on purchasing are included in this section. Moreover, it describes your setup, strategy, and trade management mechanisms.
  • Risk Management: This defines your maximum drawdowns, risk constraints, and stress relief methodology. 
  • Self Assessment: What are your strengths and weaknesses? How often will you review past results? When do you decide that your plan is not working? The Self Assessment’ section answers all of these questions.

Executive Summary

Formulating a Winning Investment Strategy

First, this part includes an overview of your investment plan.

Second, your Executive Summary outlines the highlights of each section and where the most important information can be found.

While this is the first bit of your trading plan, you should leave these details to the end. After you finish writing the strategy, you will have a clear idea of what the document looks like and how to accurately summarize each part.

As of right now, the initial step is to define your goals and objectives, which is also included in the Executive Summary.

My Goals

Most likely, you probably have an investment goal in mind (such as retirement, sending your child to college, and covering health related expenses).

Here, we will list the particulars that this subsection of your trading plan goes over. But before that, you should start with your ‘why’.

Every successful investor, corporate leader, and entrepreneur has a ‘why,’ which is the overall reason behind why they do things.

As an instance, if your goal is to save money for a mortgage, your ‘why’ is the motivation that prompted you to purchase home.

Do you want your children to be healthier by having a backyard that they can exercise and run in? Are you moving to be near a sick family member that you want to care for?

Maybe your desire is to rent out the property to pay for a child’s college education?

Regardless of what your ‘why’ is, it should be much bigger than just your own desires and needs. Include your family’s happiness or making the community a better place, to name a couple of examples.

This part is the reason you wake up in the morning to monitor the market, spend a lot of time researching stocks, and carefully manage your emotions during turbulent periods.
Your ‘why’ is what keeps you persistent and disciplined.

After you clearly define it, the next step is to layout your goals. You must have a specific number for each of those figures, down to the decimal points.

  • Time: When do you plan on cashing out and taking your profits home? At what age are you retiring and what year will it be? How soon do you have to make the down payment?
  • Amount: How much, from investment and non-investment sources, do you need for your objective. Include the specific details. For example, when it comes to closing a house, add up the moving costs, realtor fees, property taxes, and furniture (especially if you are relocating from an apartment to a more spacious home).
  • Sources: After adding up the different costs and coming up with a total, specifically define where the money will come from. Are you only relying on investments? What are the other income sources? How much do you expect to get from each?
  • Plan B: You should always have a backup solution in case anything unexpected comes up. As far as investing goes, keep in mind that it is difficult to pin down when your stocks will reach the take-profit target. At times, this might only happen after you need the funds for your goal (mortgage, retirement, …etc.).

It is detrimental to be as accurate and particular as possible. When it comes to timing and budgeting, your room for flexibility depends on how soon you plan to buy home, send your son/daughter to college, or retire.

As an instance, a parent raising money for their 4-year-old child doesn’t need to research the specific expenses at different colleges. Many haven’t even thought about potential school options at this point.

A general, ballpark estimate covers it. If you have a 15-year-old, on the other hand, you have to include travel costs (if they will study out of town), tuition fees, potential scholarships at each prospective university, laptops, equipment, and so forth.

Your goals and timelines matter for many other reasons. They determine how you approach several key aspects that this trading plan guide covers.

Investors should always review their performance and past trades on an ongoing basis. A timeline lets you determine how often you evaluate your performance and the extensiveness of each session.

As an investor, continued improvement is detrimental to your strategy. However, spending too much time on your portfolio can distract you from other obligations.

Conversely, without recurring reviews, it is hard to improve or identify weaknesses. A timeline, though, prevents these issues from arising. Investors can define the frequency and extensiveness of the revisions, based on how they align with the larger trading plan.

You also need to regularly see if you’re meeting your objective or not. After determining how much you need to generate through investments, set dates where you check your progress and measure whether or not you’re meeting expectations.

The Ask

Apart from yourself, other people from outside of your household might want to read the trading plan.

For investors that open a 529 College Fund, the university’s admissions might be interested in viewing it to verify your income. So will a lender when you apply for a mortgage.

Universities and financial institutions don’t require this, but having one certainly boosts your and/or your child’s chances of getting approved.

You can create a modified version for external readers, which must include the ‘Our Ask’ section.

Investors discuss the reason for contacting the said reader and how this document is relevant to their application or request.

As an instance, home equity applicants should tell the lender how much money they need in the Executive Summary. From there, the trading plan sections reinforce that an investor’s strategy, income, and/or credit are good enough to get them approved.

The Trading Philosophy

This section is about the central aspects and catalysts behind your investment plan. Implementing them takes place before and after you buy a stock.

The Key Components

First, what type of assets will you invest in and which markets are you going to participate in? If you will buy stocks, are you only purchasing the shares of US companies or are you considering other markets, such as Canada and the United Kingdom. Keep in mind that each country has its own laws and regulations that you will need to familiarize yourself with before investing.

Similarly, do you plan on investing in commodities or precious metals (natural gas, gold, silver, …etc.)? If so, will you buy them as futures contracts or shares of an ETF (whose price follows the movement of the underlying asset). You can also purchase currency pairs or invest in the stocks of an ETF that tracks one.

Another key area to study is time, which goes back to your original investment goals. If you’re in it for the long-term, then it’s more likely than not that your portfolio will recover from bad earnings results or market selloffs. Investors with a shorter term goal, including a mortgage or a near future retirement, have a tight risk tolerance for downturns.

The type of charts you choose will be based on your time horizon. Looking at a stock or asset’s performance over the last few decades is suitable for those who are raising a newly born infant’s college funds or recent college graduates that want to save for retirement. If you’re thinking about buying a home or retiring in the coming 2 to 4 years, then a short-term chart that covers no more than 3 years of the price history will help you evaluate if an investment is appropriate for your goals.

Your activity is similarly important. How often do you plan on buying and selling? Some investors might only need to do so a few times a year. In this case, the commissions that your broker charges might not be relevant, but their inactivity fees are. Those who want to be more involved, especially short-term traders, are better off avoiding commissions. Similarly, activity fees shouldn’t be a problem for near-term investors who open/close positions on a more regular basis.

Likewise, are you thinking about “shorting” stocks, which means making money when the price goes down? When you short sell a share, you are essentially borrowing it from the broker with the goal of buying it back at a lower price (and pocketing the difference). For example, you short sell 100 shares of ABC stock at $10 per share and the buyer gives you $1,000 for them. After the price goes down to $8, you can buy the 100 stocks back for $800, keep the remaining $200, and return the shares that you borrowed to the broker.

Technical and fundamental analysis are also important. Which one do you plan on using? Does your strategy incorporate elements from each of the two? The approaches are very different when it comes to evaluating a stock’s price, setting take-profit targets, and determining when to exit a position if it goes the wrong way.

In this section, we will look at different sources of information and the right ways to conduct research. How you deal with this depends on whether you apply fundamental or technical tools, as well as your timeline, objectives, and preferred assets.

Lastly, after you define your full trading philosophy, we will identify certain routines and psychological concepts that can minimize your losses and help you consistently grow your returns.

Structuring a solid trade plan that incorporates all of the essentials allows investors to find specific aspects to focus on. In turn, this makes it easier for them to expand their knowledge and excel in that area. Most people may struggle in the financial market if they spread themselves too thin or constantly change strategies.

Different financial instruments have their own rules, liquidity, and capital requirements. Without fully understanding how to use them, a small mistake can lead to catastrophic and unexpected losses. Concentrating on one asset and market is easier.

As an instance, if you attain a 25% return during 6 months while investing in stocks, you can learn to trade another instrument. This is done by enrolling in a course or taking online classes.

Your trade plan will act as a guide in the future. The odds are, after writing a document like this, you are going to forget many details as the time passes by. Not only do you want to regularly revisit it, but also modify it as you improve and identify new ways to get better.

Markets, Instruments, and Timeframes:

Markets and Instruments

The first step in developing your strategy and philosophy is by picking the right assets. You should always choose areas that you are familiar with. For example, if you regularly travel internationally, the forex markets and its dynamics might be a good place to start. Another area to look into is airline companies, hotels, amongst others in the travel and hospitality sector.

Which financial instrument will you choose? Are you going to buy the shares directly of these companies or will you enter a stock options contract? When it comes to currencies, you can invest in an ETF whose price movements mimic the bank note that it’s tied to. There are others ways to buy and sell currencies, including forex pairs and futures.

Each one of them is unique in its own way. Stock investments are opened when you buy or short sell a share. Subsequently, you close positions by selling or buying to cover, respectively. Options come in two types: ‘Call’ and ‘Put’ contracts. While options give you the right to own a share, they function very differently than traditional stock investments.

Currencies in the forex market can only be bought when paired against another one, like the US dollar vs. British pound (USD.GBP). Which currency comes first or second in the pair is incredibly important. In other words, you can correctly predict the price direction of an asset and have a solid investment plan in place, but a small error (such as choosing the wrong contract type and confusion about which currency should be the first or second one) can cost you a lot of money.

Because of this, you should focus on one instrument or asset. After you know fully well how to use it and enjoy desirable profits, you can start learning about new ways to invest.

Government rules and regulations are, of course, very significant. You should always keep them in mind. In certain countries, cryptos can be directly bought and sold or, alternatively, traded as futures contracts or ETFs. The US, however, hasn’t approved any ways to invest in cryptocurrencies through the financial exchanges. You can only purchase them directly from the provider.

Hedging is also regulated differently from one country to another. This refers to the practice of buying different instruments of the same asset to manage risk. Someone can invest $10,000 in a US dollar futures contract and short sell $3,000 worth of the ETF that tracks the greenback.

This way, if the currency goes down and the investor loses money on their futures contract, earnings from the short sale would minimize the damage. Again, each country’s government has its own restrictions on hedging.


Alongside determining the timeline of an investment, you should consider your daily schedule. When do you plan on doing research and analyzing the portfolio’s performance? Take your job and family commitments into account. If you work on the weekend, then dedicating one of your days off to take care of the investments is a good approach.

Meanwhile, investors whose job hours are Monday to Friday should focus on research during the weekend. When the market is open, all they need to do is buy or sell.

How often you trade and review your portfolio depends on your larger timeframe. If your goal is to raise funds for a long-term goal, such as retiring in 30 years, you only need to study potential investments and analyze your returns once every month or quarter.

Regardless of whether your goal is to go on vacation next month or send your baby to college in 18 years, uncertainty should always be factored in. What if US-China trade talks collapse again and the markets go down? Most likely, you will have to delay that trip.

Additionally, what are the odds that another recession will occur between now and when your child graduates from high school? It could happen when they’re 15 years old. By the time that the markets recover and you have enough to pay for their tuition, your son or daughter could be 20.

These events, of course, shouldn’t be intimidating when you’re prepared. For a start, no one can predict the next market crash or recession. However, having an extra savings fund or another way to pay for the vacation and/or child’s tuition will minimize the impact of major economic downturns.

Fundamentals and Technical Analysis

Which approach will you use? This will largely determine how you evaluate potential investments, calculate profits, and measure your risks. If you prefer the fundamentals, then product releases and earnings results define the right time for you to invest. Technical analysts, on the other hand, looks at chart patterns, volume, and statistical indicators to determine the best entry price.

How do you know when a trade is going the wrong way? Fundamental analysis suggests that events like economic downturns, revenue declines, or slowing product sales are reasons to dump a losing stock and cut losses. Technical principles, meanwhile, examine unexpected changes in buying/selling volume, trendline crossings, and broken levels of support (where the price repeatedly hits a low point but never goes below it).

Technical and fundamental analyses have their own ways of managing risk and measuring profits. Timelines also vary.

Fundamental and technical analyses have their own pros and cons, but there is no right or wrong system. The most important part is to be consistent and expand your knowledge in how to best apply your preferred technique. Having said that, you can combine the elements of the two investment methodologies.

For example, a certain company’s stock moves between two parallel trendlines, never going above the upper end or below the lower one. However, the price suddenly moves past its ceiling for a brief period of time, before going back down.

A technical analyst might suggest that the price is about to surge and that the market is starting to see more value in this company’s shares. At the same time, the firm just announced the release of a new product line and many analysts expect it to boost revenue.

The fundamentals, in this case, confirm the technical reading. This blend can similarly be used when setting price targets, managing risk, and in other areas of your strategy.

Nonetheless, if you are new to investing, then it is best to focus on only one of the two systems. After you becoming more fluent at implementing it, you can integrate some tools and techniques from the other method into your plan.

A good place to start is to think about specific skills or areas of knowledge that you have. Investors who excel at math or have an engineering degree might be more comfortable in implementing technical analysis. Those who work in research or graduated from business school are likely to have a strong understanding of the fundamentals.

Here is a list the aspects that you need to study and decide on before you start investing. If you choose to follow the fundamentals, your plan should include the following specifics:

  • Earnings Statements: Which periods are you going to check; quarterly or annual? What are the specific numbers (income before taxes, long-term debt, number of revenue sources, …etc.) that you plan to focus on? How far back will you go when researching the financial returns of a potential investment?
  • Revenues and Earnings Growth: When identifying trends, will you compare quarterly or annual revenues? What percentage of growth do you want to see before investing your money?
  • Analyst Recommendations: Every stock is followed by several analysts that rate it as either a Strong Buy, Buy, Neutral, Sell, or Strong Sell. Share prices react strongly to an upgrade or downgrade. Which analyst will you follow and why? Each of them factors in different elements and aspects when rating an equity.
  • Ratios: Are you using the P/E ratio, forward P/E ratio, or both? A long-term investor should avoid the quick ratio and other formulas that only consider immediate liabilities.
  • Economic Data: Which metrics are central to your strategy? GDP, unemployment, and interest rates are amongst the most significant ones. Will you examine annual, quarterly, or monthly changes? Which specific industry does your philosophy concentrate on? Stats like home sales, building permits, consumer spending, and retail sales are also significant to the broader market.

When it comes to technical analysis, which patterns will you trade? Certain ones, like the double bottom and cup and candle, are mostly useful to long-term investors.

If you are going to study daily or hourly charts, then trendlines, channels, and flags or pennants are more appropriate patterns. However, they are indicative of price changes over prolonged periods, as well.

Technical indicators are time sensitive, as well. Whether you choose the 50, 100, or 200-day moving average revolves around your goals and when you plan to reach them.

A shorter term investor who wants to raise money within 18 to 24 months can choose the 40 or 50-day moving averages. Moreover, they can incorporate the 100-day line to complement the other two to validate levels of support and resistance, as an example.

The moving averages mentioned are the most popular ones. You can either follow those and/or set your own preferred trendline periods.

It is important, though, to analyze the main ones (50, 100, and 200 days). Even if they don’t fully suit your strategy, the larger market takes them into consideration. Whenever a stock price goes above or bellow these moving averages, investors start to extensively buy or sell.

Some traders might not even use one of the trendlines apart from identifying and taking advantage of these occurrences.

The same applies to other indicators, such as the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI).

You should never make decisions based on indicators that you don’t know how to read. Always take the time to study their applications, understand the equations behind them, and determine the best ways to utilize each one before incorporating it into your trading philosophy.

Having only one indicator that you are comfortable with is better than 10 that you still haven’t fully grasped. In fact, doing so is incredibly risky. Instead, you can start adding new indicators to your strategy, one by one, as you keep learning.

Entry and Exit Rules

Which specific moment, price level, or event will determine whether you buy or sell a share? Any potential investment must meet a pre-established criteria, that you determine, before you throw your money at it.

  • Return on Investment (ROI): If you invest a certain amount in a stock, how much do you expect to make? When do you expect to realize that gain? Most importantly, how does that compare to your timeline and when you plan on using the invested savings?
  • EPS or Revenue: Buying a stock right after they announce earnings is a bad idea due to its high volatility. However, if you are a current shareholder, a certain Earnings Per Share or revenue target might prompt you to take your profits and secure your returns. What will that number be? Similarly, does your plan establish a minimum revenue or earnings per share amount that certain companies must have before you invest in them?
  • Ratios: Which one(s) will you choose (P/E, forward P/E, quick ratio, …etc.)? How much debt can a company have in relation to its assets? Will you check immediate liabilities only or does your strategy examine long-term debts?
  • Industries: Many investors like to stay cautious and only consider industries that they understand well. Others prefer to diversify their portfolio instead of putting most of their eggs in one basket. Which approach will you choose? Are their certain industries that you want to primarily invest is? Will you set a maximum funds allocation for each sector and control your risks?

When it comes to exit and entry points, fundamental and technical analysts each have their own questions that their investment plan needs to answer.

If you follow technical analysis, which specific chart patterns will you trade? One of the most successful strategies is to trade on the patterns that yielded the best results and repeat the same type of investments.

When it comes to the exit point, where will you place your stop-loss orders? Keep in mind that certain patterns don’t have one set level and investors tend to put their exit points in several places.

For example, some market participants will place their stop-loss when trading the cup and handle pattern right below the handle. Other investors will place it midway between the cup’s bowl and its highest point, which invalidates the pattern.

Will you only place one stop-loss point or are you going to exit at two separate levels? The same logic applies to take-profit targets and how they are calculated from one pattern to another.

Fundamental analysts want to consider certain news, company decisions, or industry performance numbers when setting their exit rules. This can be a minimum sales figure, revenue, or another form of data.

Similarly, government regulations might make you want to sell certain shares. If Congress, for instance, passes federal restrictions on tech companies, will you still hold on to your stocks? Are any of them especially vulnerable to these types of changes?

Summarizing Your Philosophy

To conclude, this section of your trading plan must include each of the following:

  • Instruments: A clear outline of the instruments that you will trade (stocks, futures, …etc.) and the markets you plan to participate in
  • Timeframes: The charts and periods that you examine.
  • Setup: Whether you will implement technical analysis, fundamentals, or both.

Your philosophy, however, only fills one half of the cup. The next section is about how you can manage your portfolio and control your emotions while watching your investments go up or down.

Risk Management and Parameters

Risks and Drawback Limits

You must establish a risk limit before investing, which should be a percentage of your total account balance. It represents the maximum amount of money that you will permit yourself to lose on all current investments.

Risk limits help keep you from incurring significant loses or falling victim to emotional impulses. It also sets rules on when you need to exit trades and thoroughly review your mistakes.

Most professionals set their risk limit to being between 1% to 2% of the account size.
Anything that exceeds 2% is too high, but a risk constraint of less than 1% might not give your stocks enough room to move before they start generating profits.

Your risk:reward ratio looks at how much you lose, at the worst case, in comparison to your revenues.

For example, if you buy a stock at $100 per share with a price target of $120 and a maximum loss limit of $95, your risk:reward is 1:4 ($5 loss to $20 profits).

Will you set a risk:reward as part of your entry rules? What ratio is acceptable to you?
As time goes by, you want to analyze your data, identify the percentage of profitable trades, and choose an appropriate risk:reward that maximizes your revenue odds.

One of the downsides to using the risk:reward ratio is that it doesn’t take into account your total account balance.

As an instance, if you split your funds into 5 investments, with each of them at a 1:5 risk:reward ratio, you could lose one-fifth of your account if things go wrong.

Similarly, new investors who don’t have any past performance data might struggle to find the right risk:reward ratio that maximizes their chances of making profits.

Technical analysts will limit themselves to trading a handful of patterns when their risk:reward is too restrictive.

Nonetheless, there are still many benefits to picking a risk:reward that suits your needs.
Even if you don’t primarily rely on this method, combining it with a risk limit requirement can further ensure that you invest in a cautious and conservative manner.

Going back to our example, let’s say that your minimum risk:reward ratio is 1:5. You may, should this be the case, find other investment ideas with more favorable odds, like 1:7 or 1:9.

In addition, when you blend this with a 2% maximum risk limit, your profits are further enhanced and your portfolio’s losses will almost certainly diminish.

The risk limit crucially protects you from excessive losses, which are incredibly more likely to happen during emotional times. In fact, most of the biggest financial losses occur because investors fail to let go to a declining stop and keep purchasing more shares.

Every time the market goes against you, review this section carefully to remind yourself of the established dos and don’ts.

You should never, under any circumstances, increase your limit, such as from 2% to 3%. Once you break that rule, your psychology prevents you from taking it as seriously as you did beforehand.

Not only that, but many people will keep raising their risk limit after only doing so once. The subconscious mind can impact someone’s decision-making process without them knowing, especially when it comes to money.

Just as importantly, the value of each stock shouldn’t change based on your constraints.
To illustrate, assume if all of your current holdings hit the stop-loss level, you would lose 1.5% of your portfolio’s value.

Your risk limit is 2%. Therefore, you can’t risk more than 0.5% of your account balance on any new trade you enter. Meanwhile, a potential investment you found formed the ‘cup and handle’ technical graph pattern.

Yet, at the stop-loss, the point at which the trend is invalidated, you would lose 1% of your account’s size.

Here’s where the mistake happens: Some investors might move their stop-loss to a point that falls within their maximum 2% limitation. However, the trend would still be valid and has potential to grow at that price.

While the investor only loses 0.5%, they aren’t giving the pattern time to fully form. It might hit their stop-loss, but start to quickly increase in price after the buyer sold their shares.

An alternative option would be to lower the amount of invested capital. In turn, the exit point could be set at a cheaper level while the losses, due to the smaller amount of funds involved, would fall within the 0.5% maximum risk limit.

Otherwise, the investor should find another trade.

Stop-Loss Orders

A stop-loss order automatically sells your shares if they fall to a specific price. It allows you to promptly cut your losses, especially when you aren’t monitoring the market.

You should determine where your stop-loss will be before buying a stock and place the order immediately after making the investment.

Before clicking the ‘Place Order’ button, double check and review the price, quantity of shares, and if it’s a buy or sell order.

The Fat-finger error occurs when an investor places a decimal in the wrong place (like buying a share for $854.40 when its market value is $85.44) or purchases the wrong number of stocks (typing 1000 instead of 100).

These mistakes happen more frequently than most people would think. Carefully, double-check your order before placing it and even afterwards. When you conclude the investment session, revisit it again.

Some investors like to move their stop-loss level. For instance, they buy shares at $50, define a take-profit target of $75, and place the original stop-loss level at $45.

When the stock moves to $60, the investor might move the stop-loss to $60 in order to preserve their gains.

This offers extra protection and ensures that you make money. Prices, however, might still go back up.

You always have the option of setting more than one order, such as a stop-loss to only sell half of the stocks at $60, while the rest are let go at the $45 (your original exit point).

Another method is to have your stop-out right above your entry price. This ascertains that your gains would never turn to losses.

Some brokers enable you to place ‘trailing’ stop-loss orders that follow the price of the stock. The investor who bought at $50 and placed his maximum losses at $45 would have a trailing stop loss that increases alongside it.

When the shares go to $52, the stop-loss moves to $47. However, it doesn’t work the other way around (i.e., the stop-loss doesn’t become $44 when the stock is at $49).

The trailing order is either a certain percentage of dollar amount below the actual share prices.

You have plenty of flexibility to determine which approach suits your needs. Yet, always write down every detail as part of your trading plan.

How many stop losses will you place? What percentage of the investment/number of shares are sold at each?

If the answer to this question depends on the circumstances of the specific stock you bought, outline that and the factors that determine how you place the stop-loss orders.

To give an instance, some technical chart patterns have a clear point that, should the price dip below it, breaks and invalidates the trend. Most market participants set at that single level, so it makes sense for you to have one stop-loss order.

Meanwhile, other patterns (like the cup and handle) may have multiple exit levels. The stop-losses can be established accordingly.

  • Day Order: This order is only in effect until the end of the trading day. It is canceled when the markets close.
  • Good-Till-Canceled: GTC orders remain open for a longer period of time. Each broker has a duration that the GTC order will terminate after (60 days, 90 days, …etc.).

As far as stop-losses are concerned, a GTC order will give you piece of mind. However, be aware of when it expires and regularly monitor open orders to make sure that each investment has a stop-loss.

Circuits and Maximum Drawbacks

When you incur large losses, the best option is to step away from the markets and take a break. Everyone makes mistakes, including the most successful and profitable investors.

One of the key choices that you have to make doesn’t just involve buying or selling, but whether or not you should be investing, to begin with.

Define a maximum loss amount per day, week, and month. If you reach that level, take a break.

To give an example, let’s say that your maximum risk limit is 2%. After all your investments go against you and you lose 2%, it might be best to avoid the portfolio for 2 days.

After that time has passed and you lose another 1% in one day or at any point during the week, then you stop investing until the following Monday.

Whichever numbers and time periods you choose, it is important to write them down and stick to the plan. All parts must also be specific, including the loss percentages, number of days or weeks, and so forth.

The New York Stock Exchange has what is known as ‘circuit breakers’. After major indices (such as the Dow Jones and S&P 500) decline by a certain percent in one day, markets will close until the next morning.

When the S&P 500 goes down by 7% (in comparison to the previous trading day’s closing price), all activity is paused for 15 minutes. Another 15-minute halt is triggered at a 13% drop.

If the losses reach 20%, the exchanges will close for the rest of the day.

The same process applies when Dow Jones Industrial Average or the Nasdaq go down a particular percent.

The ‘circuit breakers’ are established to allow investors time to regroup. When many people make impulsive and emotional decisions at one time, stocks go down even more because of the heavy selling volume.

Psychological Management

Here are some of the most common psychological errors that investors make, especially beginners:

  • Getting addicted to trading and hurrying to buy stocks.
  • Impulsively purchasing or selling shares after incurring severe losses.
  • Becoming complacent after making money and ignoring key decision-making principles.
  • Letting a bad day in the market impact their mood and other areas of life.

While research, analysis, and risk management are important parts of being a profitable investor, your psychology is just as significant.

In fact, without managing your emotions, all the work you put into identifying the right investment is meaningless.

You should also avoid the markets if you are concerned about personal matters or feel financially pressured. The stress increases the likelihood of errors and emotionally driven decisions.

The same applies when you’re feeling sick or didn’t get enough sleep.

Stress Relief and Preventing Emotional Decision-Making

There are two key ways to manage your psychology. First, find methods to cope with losses. Your plan should include activities that help you bring stress levels down.

Choose something that you personally enjoy doing, such as going for a walk in the park or running. Many investors find exercise and yoga to be calming.

Your routine can be done before or after market hours. If you get nervous or agitated after buying a share, pre-investing routines can keep you relaxed.

Stress relief, for a start, prevents a bad day in the market from spilling over to other areas of life. You might get into an argument with your spouse or find yourself unable to concentrate at work.

These issues will likely take time out of your day, which is another form of intangible losses.

In way, how you keep calm is like your psychological risk limit. This part of the process requires plenty of discipline. Don’t just identify these activities, but write them down and ensure that you follow them.

Remember the circuits and how the entire exchanges have to shutdown after incurring severe losses? Your own rules about when you should stop trading and for how long give you time to manage your stress.

In fact, taking a break disputes negative emotions, especially by the next time you participate in the market.

During volatile situations, review these sections of the plan. When stocks move in a rapid pace, your heart will literally start beating faster and emotions start to take control.

This document and your discipline technique are there to remind you of your strategy and ensure that you abide by it when uncertainty is rampant.


On a periodical basis, revise your performance to evaluate how you’re doing. This entails revisiting the plan, making alterations (as needed), and identifying areas that you missed or forgot about.

Initially, this allows you to reinforce how strictly you follow this document. It also gives you a chance to identify your weaknesses and improve, which translates to more profits.

When you set your goals, keep checking how close you are to achieving them. If you need to catch up, find other ways of increasing your returns or consider additional income sources to fund your mortgage downpayment, child’s education, or any other objective that you have.

A more desirable scenario is when your gains exceed your what you aimed for. At this point, you might want to treat yourself to a reward, such as a nice restaurant meal or a road trip.

In the next section, we cover the specific metrics and methods that you should use to track your results. Beforehand, investors need to outline their main strengths and weaknesses.

Knowing your weaknesses shouldn’t discourage you from participating in the market. Instead, being aware of these shortcomings enables you to curate a self-assessment strategy that revolves around what you can and can’t do.

Think of it this way: If one your car’s wheels is not fully aligned, you are going to drive more carefully and avoid potholes or roads that might damage the vehicle.

Understanding potential issues with your car permits you to prepare accordingly. Being on the road without recognizing this problem, on the other hand, is dangerous and risky.

Your investment plan should take certain weaknesses, like distractions and time commitments, into consideration. From there, you can focus on strengths and develop a strategy that minimizes the impact of your flaws.

Doing so ahead of time and taking precautions ensures that your investment experience will run smoothly.

Your Strengths and Weaknesses

  • Industry Knowledge: What sectors do you specialize or work in? Your expertise, employment experience, and college major are your strengths. Meanwhile, your weaknesses are the lack of knowledge in particular industries and limited ability to comprehend specific aspects (such as financial statements or political events).
  • Skills: Are you good at math? Do you have a background in sports? The stock market, whether you opt for the fundamental or technical approach, requires plenty of calculations and statistical analysis. If your math skills aren’t all that, this is a flaw that you need to improve. Similarly, a sports background makes it easy to cope with the competitive and fast-paced nature of the financial exchanges.
  • Timezone: In which timezone do you live? The markets open at 9:30 am New York time and close at 4pm. If you are located in the western United States, trading starts at 6:30am. Whether that’s a strength or weakness depends on your work hours and other time-consuming commitments.
  • Daily Schedule: Does your schedule give you enough time to research and manage investments? If you reside in the East Coast and go to your job from 9am to 5pm, that’s a weakness that you will have to address because the markets are only open while you are in the office/employment location. 
  • Psychology and Discipline: Every person has their own psychological impulses. Some people struggle to manage their anger, while others get stressed and anxious very easily. Certain investors might get overly excited and complacent after making money, which causes them to make rushed and reckless decisions.

Concentrate on the sectors and industries that you understand well. Just as importantly, you must carefully define the market-moving events or players that confuse you.

As an instance, investors who struggle to read the Federal Reserve’s interest rate policy statements should avoid trading before or after related announcements.

You don’t need to be an expert at every sector or industry, but it is necessary to educate yourself about key events that move the markets.

For example, if you are unaware of how tariffs work or have limited information about global trade relations, take the time to expand your knowledge in this area.

Any developments on that front are more likely than not to impact the entire exchanges. This is a topic that you can’t afford to ignore because your holdings will immediately react to any news or announcements.

In fact, stocks of companies across all sectors are sensitive to trade and tariffs.

The same applies to your skills. If you have a background in math or statistics, learning about technical analysis should be easy. Similarly, you will be able to immediately evaluate fundamental metrics, such as the P/E ratio or quarterly revenue growth.

Timezone is another crucial element to consider. You should think about it in relation to other commitments, like your work hours.

To illustrate, assume that one investor lives in Los Angeles and the other is located in New York. Both of them have a job that starts at 9am and concludes at 5pm.

When the stock market opens, the time is only 6:30am in Los Angeles. The investor who resides there can buy/sell shares and manage the portfolio before having to go to work.
In this instance, the timezone acts as a strength. However, a potential shortcoming could arise if the investor finds it difficult to wake up early.

Keep in mind that you have to be fully alert after getting out of bed. Needless to say, making buy or sell decisions with a half-asleep mind is not a good idea.

Another problem that the Los Angeles-based investor faces is, by getting up at 4:30am, they feel tired halfway through the day while at work.

There are several possible solutions to this issue. They might decide to only rise that early once or twice per week (or as needed). Another way to address this is by finding ways to remain energized throughout the day, such as having a light lunch or drinking more coffee.

The New York-based investor, on the other hand, deals with completely different scenarios. When the market opens, to begin with, they are going to be at their place of employment, already.

This market participant might want to trade during the after-hours and only review their portfolio during the weekend.

Another alternative is to download the broker’s phone app and buy/sell stocks during the lunch break.

Again, the way you handle this depends on your specific situation. If you work an evening shift, there could be room for trading activity before you go to your job (but that depends on the timezone you live in).

You should also recognize potential distractions. Do you have a baby or young child that might need your attention? What are other members of your household doing when you’re researching potential investments?

The Los Angeles-based trader who wakes up at 4:30am can easily avoid getting sidetracked when most people are asleep.

Meanwhile, their New York counterpart may get distracted by coworkers during the lunch hour.

If you are worried about issues at home, consider working on the portfolio at a coffee shop or library. However, some people might be uncomfortable pulling up screens with financial information as people pass by them.

Again, the way you manage your weaknesses and surroundings is tied to your personal schedule, household size, and how your strengths can help you manage your flaws.


After you invest your funds, write a trade plan for each stock, and conclude all of the essentials, there is still plenty of work to do.

First and foremost, you need to regularly check your portfolio and how it’s performing. Are there any shares that you need to sell?

Set a time to review your investments in detail and analyze their results. This should be a recurring routine that you do every week, month, or quarter.

Do you notice any trends that you could improve? Which patterns yielded the best results? How about the ones that led to losses? Are there companies in specific sectors that are outperforming the rest?

Once you identify a flaw, especially through statistical breakdowns, your performance dramatically improves.

In addition, when you find the common circumstances behind your successful trades, you can enrich these profitable aspects.

Education is a key part of growing as an investor. There are many ways for you to learn new things about the financial markets.

Your plan should incorporate this in writing while a routine should be established to ensure that you follow the guidelines that you set.

For example, you can read an investment book chapter every night or every other evening. Similarly, participate in a live training seminar to learn from experienced investors and expand your own network.

Are you going to read news articles? How often? Will you have the paper delivered to your home every day or on Sundays as a reminder?

In fact, staying up to date on the latest news allows you to identify risky investments and exit at a profit before it goes south.

Let’s assume that you have extra funds to put into the stock market. When you research potential companies and analyze their performance, there also has to be a certain routine for you to follow.

Are there any potential distractions, such as children or a dog? Will you do this at home, a coffee shop, or elsewhere?

Sometimes, working out and visiting the gym helps put you in the right mind frame. In fact, it builds your confidence and helps you stay calm.

There are other methods that investors use. It is very important to remember that participating in the financial markets is an emotionally and psychologically demanding task.

You should always be mindful of the best practices and activities that help you make rational decisions. A visit to the gym can literally make you money or cost you some.

The investment routine you setup should be incorporated into your daily life. For example, if you choose to follow the financial news every morning, make that part of your breakfast.

Investors who want to read the newspaper every Sunday might try to make it the norm to sit with their children while they do homework.

Phone alarms, calendar reminders, and calendar notes are effective techniques at ensuring that you consistently stay on track.

Let your family know about your new habits, like working out or reading a book. This will help keep you in check and hold you accountable.

Financial Reviews and Measurements

In the previous sections, we talked about the importance of recurring review sessions and establishing a schedule for them.

Now, we are going to specify the different measurement metrics and numbers that you should focus on.

One key mistake that investors make is that they rely on the broker’s statements to calculate profits. However, each brokerage firm has their own way of determining your gains and losses.

Nevertheless, we do discuss the types of portfolio statements and how to read them, alongside the factors involved in extracting your gains.

Just as importantly, if you don’t track your performance, it can be hard to differentiate between losses/gains and deposits/withdrawals.

This part of the article is designed for beginner and experienced investors, alike. Those who have been trading for a while will know how to evaluate their past performance and define significant metrics.

New investors who don’t have a record yet can set up spreadsheets and equations when they get started. This way, the process of collecting data and information becomes faster and easier.

Tracking Everything

First and foremost, you want to create an Excel or Numbers (for Mac users) spreadsheet. This should contain each stock you invested in, the purchase price, stop-loss level, and take-profit target (if you haven’t sold it already).

You should include each of the following:

  • Symbol: The investment’s ticker symbol. For example, Amazon’s ticker is ‘AMZN’ while the US dollar vs. British pound pair’s symbol is ‘USD.GBP’.
  • Instrument: Whether you bought a stock, ETF, futures contract, currency pair, and/or any other type of financial instrument or asset.
  • Trade Type: Most long-term investors only buy stocks. However, if you also plan on short selling (to make money when shares go down), note that down for each trade.
  • Entry Price: How much you bought the stock or financial instrument for.
  • Entry Date: The day, month, and year of the initial investment.
  • Exit Price: How much you sold your shares fo
  • Exit Date: When you closed the position.
  • Result: Whether it was a profit or a loss.
  • Win Ratio: How many of your trades were profitable? What about those that weren’t? If you opened 10 positions during a given quarter, with 6 of them generating positive returns and 4 of them being losers, your win ratio is 60%.
  • ROI: The percentage returns on your capital. For example, you invest $10,000 in a company by buying 1,000 shares at $10 each. Afterwards, you sell them for $12 and make a profit of $2,000. Your ROI (return on investment) is 20% (the $2,000 returns divided by your initial $10,000).
  • Earnings: How much you made in dollars, but after deducting commissions and interest. In the illustration above, if your broker charged you $5 commission when you bought the stocks and another $5 after selling them, your earnings are $1,990 (the $2,000 profit minus the $10 in fees).
  • Method of Investment: Technical analysts would define the type of pattern (double bottom, flag/pennant, cup and handle, …etc.) while fundamentals should identify if the investment decision was based on industry data, the P/E ratio, or an earnings report.

Each of these metrics should be included in your spreadsheet. Why is this important? Because you can easily track what works and what doesn’t.

As an instance, you will be able to find out how many of your short and long trades were profitable. From there, determine if there are any correlations between profits/losses and whether you long or short stocks.

Similarly, you can find the investments that had the higher ROI and look for common grounds (such as the type of instrument or technical pattern). This part, in itself, makes a massive difference on your future returns.

Conversely, find at your biggest losers, in terms of both ROI and earnings, and see what you did wrong. Investors might realize that their investments in futures, for example, were mostly unsuccessful while their stock holdings generated the most profits.

Going forward, the investor can maximize their performance by avoiding futures contracts and concentrating on shares.

Just as importantly, every broker has their own way of measuring your returns. Make sure that you understand the calculations and methods that your brokerage firm follows.

For instance, you open a new account in January and deposit $10,000. In April, you contribute an additional $5,000. However, during September, a family member became ill and you had to withdraw $2,000 for medical expenses.

Between January and September, you made $3,000 in profits from your investments.
How do you measure the returns? Do you divide the $3,000 gain by your original $10,000 deposit, the $15,000 balance after your April deposit, or the $13,000 that was left after you withdrew funds in September?

Each of the above approaches will give you a different ROI. Some brokers will divide your $3,000 in profits by the average account balance throughout the period. Others will account for deposits or withdrawals more heavily.

Moreover, some brokerage platforms count commissions and trading fees in your earnings statement. Yet, these costs aren’t included as part of the ROI percentage.
Again, how this is accounted for depends on the firm that you go through.

If you use the broker’s ROI number, it is detrimental to know how they calculated it. This allows you to accurately analyze these figures and understand the factors that impacted them.

Apart from yourself, you have to consider who else might view your portfolio’s financial metrics.

An investor who opens a First Time Home Buyer account will likely show their profit and loss statement to potential lenders.

This gives them an idea of what your income from investments is, how much you have for the down payment, and the likelihood that you will honor your mortgage payments in the future.

The Conclusion: Ongoing Education

Your trading plan is the blueprint that defines your strategy, rules, and risk management process.

Investors shouldn’t just have their strategy written down, but they must also review it on a regular basis and make sure that they are following all of the steps.

After going deeper into the financial markets, you will come across different investment ideas and philosophies.

Some people might tell you why their approach works best and how you can benefit from following it.

However, that doesn’t mean that you should listen to them. Your trading plan is designed by you and for you. It encompasses the specifics based on your individual circumstances, goals, and weaknesses.

No one else can draft a strategy for you.

Having said that, it is important to keep modifying your document as you keep improving and getting better.

Maybe you find out that certain instruments always cause you to lose money? What if you discover psychological triggers that you weren’t aware of before investing?

Your plan must change accordingly.

Perhaps most noteworthy, education and learning are an ongoing process that follows you all throughout your investment journey.

Even the most successful and experienced traders prioritize expanding their horizons and attaining new skills.

There are many ways for you to educate yourself.

Maybe you should consider reading a book about the financial markets? How about training seminars and workshops? There are plenty of them out there.

Some investors might enroll in a part-time graduate degree program and work towards a master of finance, as an instance.

Consider joining a union or association for financial market professionals. You will expand your network, learn new things, and discover profitable trading approaches that you weren’t aware of.

Unions and associates offer educational material and others forms support to investors, as well.

Moreover, many brokers provide their clients with free consultations, professional advice, and portfolio management assistance.

Take advantage of this, especially when you feel that you need the help. Ask your broker if they also offer webinars and training booklets.

All of these resources that we outlined can take you a step forward and gradually boost your returns.

This article went over how you should write your trading plan and all the details the form it. Now, you will be able to craft a profitable, yet evolving, strategy.

After writing and finalizing your investment plan, the next step is all about your discipline, adherence to the agenda, and how far you are willing to go so that you keep improving.

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher

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About the Author James

Helping people build sustainable budgets and passive income.