Small Cap Stocks: How to Develop your Own Trading Plan

We all want to make obscene amounts of money in the market.

But to do so, we have to establish a plan, and actually stick to it.  Without a plan, you’re really gambling instead of responsibly trading and investing.

Here are some of the key steps to creating a plan for success.

Tip No.  1 – Create a Stock Watch List

A watch list is simply a list of potential stocks you may or may not be interested in trading at some point.  It can range from a couple ideas to dozens.  But I always suggest keeping the list small so you keep from overwhelming yourself. Wait for a particular stock to meet your personal criteria before blindly throwing money at it.

Tip No. 2 – Check the Fundamental and Technical Signs

Economic indicators are a great way to identify what’s happening in a particular sector.  Is the overall sector trend up or down?  Is earnings growth on the up and up.  Are there emerging catalysts that can impact the sector and your trade in particular?

Simply put, fundamental analysis — at its core — entails using real data to arrive at stock’s intrinsic value. Part qualitative and part quantitative, this method analyzes the financial data that is ‘fundamental’ to a company’s future prospects.

As such, fundamental analysts make their investment decisions based largely on:

  • A company’s competitive advantage
  • A company’s earnings growth
  • A company’s sales revenue growth
  • A company’s market share
  • A company’s financial reserves
  • A company’s product pipeline
  • The quality of the company’s management

In doing so, fundamental analysts focus on a company’s financial statements and profit by finding gems that the market has mispriced.

You also want to keep an eye on volume and technical pivot points, using momentum indicators such as Bollinger Bands, relative strength (RSI), MACD, Williams’ %R and Money Flow.

Tip No. 3 – Have a Stop Loss in Place Always

As an investor, you should be familiar with a stop-loss, or the order given to a brokerage to sell a position once it drops by a certain amount or hits a certain level.

However, a trailing stop-loss adjusts higher as the price of an asset rises, thus allowing the investor to lock in gains.

For example, if a long position were bought at $10 with an initial 25% stop-loss set at $7.50, the trailing-stop would rise in tandem with the asset.

Trailing stop losses are essential in today’s trading environment.

Say you bought stock ABC at $6 a share.  As it pushed toward $9.00 a share just weeks later, you begin to get a bit nervous that the run is coming to a near-term end…

To protect your gains should the bottom begin to fall out, you can use a 10% trailing stop-loss.  In this case, you’d set your trailing stop-loss at $8.10 ($9 x 10% = 90 cents; $9 – 90 cents = $8.10).

This way, should the run end, you still lock in a solid gain of 35%.

Tf the stock continues to head north, nothing happens. The trailing stop-loss isn’t triggered.  However, if the stock turns south and hits that trailing stop-loss, the stock is sold — and you pocket the profit.

It’s a safe, easy strategy that should be part of all portfolios.

Tip No. 4 – Be Mentally Prepared

Success is not always a guarantee.  But if you have a plan in place, you increase your odds significantly.

A trader with no plan for action has already lost.  Do you know when to exit on an up or down move?  What stop losses or trailing stop losses do you have in place? Know these things, and set a plan so you won’t run into “crash and burn” scenarios as often as those with no plan.

Pros know when to just walk away from a trade. Remember, stocks don’t just move up.  They also come down.  With technical markers in place – such as with MACD, and RSI – traders can better pinpoint where things could all fall apart.

Lower expectations.  Inexperienced traders expect to quit their day job and make a fast-paced, hot lifestyle out of trading.  That’s not going to happen.  No one ever became a brain surgeon or rocket scientist first year in. The same applies to trading. If you make a mistake, learn from it.  Don’t repeat it.

Remove all emotion from your trading.  That doesn’t mean you have to have ice flowing through your veins.  It simply means you need to re-think your strategy. No matter what your emotion says, never allow emotion to dictate your trading action.

Never wait to take profits… If you have good profits in hand, take them.  Exit half of the position and let the other half run.  But don’t leave profits on the table for too long.

These are just a few ways to plan ahead.

Make a mental resolution to follow each.  And over time, you may improve your game.