There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are srious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."

If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.

Take heart from the words of Warren Buffett: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound framework for making decisions and the ability to keep emotions from corroding that framework”.

A trading plan can provide you with the framework that you need to succeed in the sharemarket."

Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan.

So, what's a trading plan anyway?

A stock trading plan is a strict set of rules and actions which formulate your stock trading strategy. A stock trading plan defines when to buy and sell stocks and at what prices. Every trade you make should be governed by your trading plan.

Like I already alluded to, a stock trading plan is very similar to a company Business Plan so let's develop this idea further: A Business Plan is a device for the owner which sets out how the company intends to operate the business. A business plan is also a road map to tell investors and others how you expect to get there. A business plan covers all aspects of the company, from overall strategy and marketing to finances and the company’s goals. In the same fashion, a trading plan lays out how the trader will make trades - the time, price, volume, and news are all essential components of the trade. While your trading plan may not necessarily be for others, it is still your own road map to tell yourself, and reaffirm to yourself, how you expect to get there. Include goals in your business plan: 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, and even 20+ year goals you would like to reach through your trades and investments.

A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves. Like the markets, a good trading plan evolves and changes, and should improve over time.

Trading Plan Essentials

There are many essentials you should include in your business plan. These essentials lay the foundation of your plan and will help you reach your goals. Here are 10 essentials that every plan should include:

1. Are you ready?

Compare online trading with learning how to fly a plane. Would you consider doing it without learning about it first until you can literally do it without having to think about it? The same applies to trading... Here are some questions you should ask yourself to assess your level if preparedness:

-Are you familiar with your trading platform and its resources? -Can you read a chart in everytime time frames ( 1-2-5-15-30 minutes, daily, weekly, monthly, etc...) and recognize basic candles, formations, figures, etc... -Do you know the current economical status and current trend we're in?

-Do you know proper money management rules?

-Do you have good equipment: Enough screens (2-3), enough RAM, >speed of processor, good seat, easy access to any documentation, enough room to work comfortably, a back up in case your system crashes like a laptop, a battery to keep your equipment powered long enough to manage your position in case of am outage, dial up capacity if your internet access is affected by an outage

2. Mental preparation

Did you know the two biggest factors most traders fail to succeed at trading are FEAR and GREED?

Yup, you may have the top of the line system, the best trading plan on earth and the biggest account out there, if you let fear and greed lead your trading, you will fail. Here's what you need to be at your sharpest:

-The most important part is to know your stuff well enough to teach it -Even if you are knowledgeable, you need to follow your plan (yes this means you need one...) -You need to be calm, focused, well rested, well nourished, free of distractions and "in the zone"

3. Set your tolerance level

How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day Example: Your entire portfolio value is $10,000. On this trade you use $1,000 to buy. At 2% risk, you are willing to lose $200 of your $1,000. The stock price can fall 20% before this 2% loss dictates selling. That means if you identified you didn't want to lose more than 2% per day and you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. An important part of a trader's life is to know when to walk away. This might sound pretty simple but believe it's not. Once again, follow your plan which should include such a possibility.

Important aspects of risk management:

Position Sizing: The key to managing risk is to position size correctly. Buy fewer shares and allow the price action room to move if conditions have become lumpy. Seek risk by buying more shares when in profit, or if conditions are more stable. There are many ways to correctly gauge your position size according to sound risk and money management principles. Whichever method you follow, make it explicit by writing it in your trading plan. For beginners, once you paper traded long enough to get obtain decent results, I would recommend starting with no more than 100 shares at a time. When trading live, emotions will come into play and you will most likely be making a lot more mistakes than on paper and probably even break some stops. The most important lessons you will learn are the ones thru losses. But you can keep those losses small by trading small amounts of shares only. You should trade small for at least one month.

Margins: A margin can be a very useful tool for many traders, but can be scary and risky if not used properly. You can get a margin call from your stock broker at any time, which means they want to collect their money now. Margin gives you extra buying power. Margin also gives you additional risk. Use margin cautiously and wisely. Some traders do not use margin at all.

Cash: Keep extra cash available in your account. You will see many opportunities but you must be prepared to take advantage of them. If you have little or no available cash, you will not be able to execute this trade. You may want to have 10% - 20% of your entire account value available.

4. Set goals

Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.

5. Trade preparation

-Before the trading day, reboot your computer(s) to clear the resident memory (RAM)

-Identify the stock you want to follow on a given day using your favorite(s) source(s) Examples: screener, news, research, technical analysis, fundamental analysis, etc.

-Refine your “buy list” (stocks on your radar you are considering buying)? Examples: valuation, screening further, great news, great earnings, strongest technicals, strongest fundamentals etc.

-What price are you willing to pay?

Sometimes the current price may not be the best price for buying. Will you wait for a better price?

Move to the next stock in your list? (Use the information you identified in step #3)

-Does the stock have good volume? Very low volume history means you may not be able to sell the stock at the price or time you want. Keep this in mind. High volume means high liquidity and is generally easier to sell and more actively traded.

-Using Technical Analysis: make sure you absolutely understand how the technical analysis indicators you use work. Your favorite indicator may not be useful in many situations. Sometimes you simply have to adjust its value to make it useful so make sure you backtest it (simply modify the value of the indicator you want to use so that it gives proper buy sell signals when you look back a few weeks/months)

-Using Fundamental Analysis*: again, make absolutely certain you understand how fundamentals work. This means reading through past earnings reports and the company’s balance sheet, income statement, and cash flow statement. Sometimes a stock will have great fundamentals but will not move in the direction you expect due to other factors, such as news, or future outlook. *I always look at the fundamental aspect of any trade I take but depending on my trading horizon I will give it more or less weight. For example if I daytrade the fundamentals won't have so much impact on my decisions...

6. Do your homework

–Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100 exchange-traded funds up or down in pre-market?

Index futures are a good way of gauging market mood before the market opens. What economic or earnings data is due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important economic report. For most traders, it is better to wait until the report is released than take unnecessary risk. Pros trade based on probabilities. They don't gamble.

7. Set exit rules

–Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don't want to take a loss. Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits. Before you place your order, you must decide on where you will exit. I advocate that you use a stop loss to capture your profits and avoid large losses. Here are a few ways to set a stop loss:

* Pattern based stop loss traders will exit trades if the share breaks downwards through a trend-line or a significant line of support.

* Technical indicators can be used as a stop. A crossing

of two moving averages may trigger an exit.

* Percent drawdown or retracement methods suggest that

if the instrument drops in value by a set percentage eg. 5%, then an exit should be made.

* Some traders continually raise their stop-loss prices as the stock price climbs. This is called trailing stops or raising stops and can be a very useful tool for locking in gains and reducing risk. I use trailing stops.

Another type of "stop loss" is based on factors like poor earnings, weak or declining market, market corrections, poor news, lost contracts, etc. which will encourage you to exit the position without hitting "actual" stop losses.

To exit a position in the sharemarket, you can choose to implement one of these types of stops or even a hybrid of any of these methods. I personally found a great combination which simplified my trading immensely… If you`re interested, I strongly suggest you get my complete trading system.

Derivatives can use all of these types of stops and more. If you are unfamiliar with any of these techniques, it is essential that you research them to find out the most appropriate stop for your own requirements.

Regardless of which one(s) you choose, you should know where your exits are. There are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count. Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to break even if you wish. As discussed above in number three, never risk more than a set percentage of your portfolio on any trade.

8. Set entry rules

–This comes after the tips for exit rules for a reason: exits are far more important than entries. A typical entry rule could be worded like this: "If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here." Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions. If you have 20 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Once again, emotions are your worst enemies here.

So the key is to develop a scientific process for analyzing signals, and do not let your emotions dictate your trading habits. You need to define your signal in words so that another trader unfamiliar with your technique can duplicate your strategy. If it’s not duplicatable, it’s not a system.

9. Keep excellent records

–All good traders are also good record keepers. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes. Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade and lessons learned.

10. Perform a post-mortem

– After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.

So once again, using a sporting analogy, the first step towards achieving sporting success "is to define specific goals to accomplish within set time limits. Wanting to 'win' is not sufficient. The daily process of moving towards that goal must be mapped out to ensure success." Treat the business of trading as seriously as if you were preparing to represent your country at the Olympics. Define your personal level of aggression, estimate the returns for different strategies and be realistic about your own capabilities. Consider every conceivable occurrence in advance.

Money is made as a by-product of following a sound trading plan, and adhering to the principles of money management. If you end up losing a significant proportion of your trading capital due to greed and ignorance, you can no longer trade, and you are out of the game.

"Luck is When Preparation Meets Opportunity" by Oprah Winfrey

For a trader, the preparation means making your plan, developing your strategies, testing your techniques, and continually refining it all. The opportunities are there for us to take advantage of. We will only find success when our preparation intersects with our opportunities.