Creating a Trading Plan from a Financial Advisor

Most investors benefit from having a diverse portfolio, making regular contributions and rebalancing over time to reach their goals. However, some investors may have the interest, time, and skills to trade securities actively.

Having a well-structured trading plan can provide clarity and guide decision-making through market fluctuations. Here’s how to create one that works for you.

What Is a Trading Plan?

A trading plan is a guide for buying and selling assets like stocks, bonds, and ETFs. It serves as a vital tool during market downturns, helping you stay the course when your portfolio is under pressure.

However, it is also important in rising markets. This can help prevent impulsive decisions, like cashing out too early. Such actions may disrupt your long-term strategy.

A good trading plan helps reduce emotional decisions. It adds structure to your trading and keeps you focused on your financial goals.

Trading plans outline the rules for when and how to buy or sell, making them useful for both short- and long-term objectives. Some people think of "trading" as quick, short-term actions. In this case, it just means buying and selling investments.

A trading plan can help you, no matter your goals. If you are a short-term trader seeking quick profits, it will guide you. If you are a long-term investor planning for retirement, it will also provide direction.

What Should a Trading Plan Include?

A trading plan gives you a clear way to buy and sell securities. It helps you feel more at ease and stay focused on your financial goals. Here are the key components to consider when building your plan.

Trading Objectives

Your trading objectives act as the mission statement for your investments. Are you buying securities to diversify your portfolio or meet a specific financial target? Identifying your “why” is essential for shaping your strategy. Depending on your objectives, consulting a financial advisor or attending coaching sessions could be beneficial.

Risk Tolerance

Knowing how comfortable you are with risk is just as important as understanding your trading goals. Risk tolerance refers to both your willingness and financial ability to endure losses.

While the stock market has historically grown over time, there have been extended downturns. Accepting the possibility of losses—up to the full amount of your investment—is crucial, especially with active trading. Keep in mind that your tolerance for risk may vary across different accounts or financial goals.

Time Horizon

Your time horizon influences how much risk you might take on. A longer timeline gives your investments more opportunity to recover from downturns. For example, if you want to make a quick profit in one day, you might use less money than you would for a year-long plan.

Tax Considerations

Understanding how taxes affect your trades is essential. Securities held for a year or less in a taxable account are subject to higher short-term capital gains tax rates. Interest and dividends may also be taxable, so it’s wise to set aside funds for your tax bill.

Tax-advantaged accounts, such as 401(k)s, IRAs, or 403(b)s, offer ways to grow your savings more efficiently. However, it’s generally not recommended to engage in frequent trading within retirement accounts. Consulting with a tax professional can help you develop strategies to minimize your tax liability, such as tax-loss harvesting or using the right account types.

Asset Preferences

Choosing the right assets is crucial to align with your goals, risk tolerance, and time horizon. Investments can range from low-risk assets like government bonds to high-risk options like individual stocks. Mutual funds and ETFs may be ideal for long-term goals since they spread risk across multiple securities. Defining how much of your portfolio will go into each asset type ensures a balanced approach.

Entry and Exit Strategies

Your entry and exit strategies dictate when to buy and sell investments. Having these plans in place ahead of time helps you avoid impulsive decisions driven by short-term market fluctuations.

Set clear rules for when to take profits or cut losses. You can focus on a specific price. You might also look at a percentage gain or loss.

Another option is to use a technical indicator to assist with your trades. Utilizing tools like price alerts and different order types can also help you manage your entries and exits efficiently, ensuring your trades stay within your desired risk levels.

A thoughtful trading plan acts as a roadmap, helping you stay disciplined in both volatile and stable markets. By carefully crafting each element, objectives, risk tolerance, time horizon, tax considerations, asset preferences, and entry/exit strategies, you’ll be better equipped to achieve your financial goals while minimizing emotional decision-making.

Revising Your Trading Plan

As market conditions, personal finances, and goals change, it’s normal to update your trading plan. This helps you stay in line with your needs. However, thoughtful revisions are essential to ensure your strategy remains effective.

Two key points to remember:

1.     Avoid making changes as a reaction to short-term market fluctuations, such as sudden drops in stock prices. Your trading plan exists to help you stay focused and resist emotional decision-making during volatile periods.

2.     If you do decide to update your plan, make sure you have a new strategy in place to guide your trades moving forward. It’s important to maintain structure, so your decisions remain intentional and aligned with your long-term objectives.

Bottom Line

Whether you trade often or invest for the long term, a good trading plan is key. It helps you stay focused on your financial goals. It helps you handle market highs and lows with a clear plan. This reduces the impact of emotions on your choices.

Review and update your plan regularly. This will help you manage risks better. It will also allow you to take advantage of new opportunities. With the right structure in place, you can approach the markets with confidence and discipline.

Sources:

https://www.fidelity.com/learning-center/smart-money/trading-plan

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss. As with any investment strategy, there is the possibility of profitability as well as loss.

Mutual funds are offered only by prospectus.  Carefully consider the investment objectives, risks, charges, and expenses of mutual funds before investing.  This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing.