It’s a fact: The most successful people consistently use routines, or step-by-step processes to get things done efficiently and effectively. It follows that if you want to raise your trading and investing profits, you can definitely do so by establishing a well-thought out plan (or series of plans) that you follow each time you approach the market.
Why? The stock market is a whirlwind of geopolitics, government policies, sector cycles, company events, and the fluctuating forces of supply and demand. It’s no wonder that market participants—and you may be one of them (most people are)—feel overwhelmed, from time-to-time. The best cure for “overwhelm” in the market is to establish a routine, or plan(s), that leads you to arrive at the best decisions and take the most profitable actions for your portfolio.
The following are three key reasons why having step-by-step plans are key ingredients to earning consistent profits in the stock market:
First, step-by-step routines, or processes keep us moving ahead in an organized fashion. I don’t know about you, but when I start to research, it’s easy to mentally and visually “wander off.” If I haven’t a plan in place that I’m committed to, I may begin to research one company as a potential buying target. But then a talking head on CNBC declares that Sizzling Software is going to soar to the moon. Before I know it, I’m checking out Sizzling’s numbers . . . which upon digging deeper . . . don’t look so hot after all. Now I’m completely off track. My original target is languishing, new emails notices are popping up on my screen, and I’ve just wasted an hour.
Had I focused myself on a step-by-step process to researching my target stock, I would have decided against buying it, or it would be a potential profit vehicle in my account by now.
Second, when we come to the market and follow an organized plan, we tend to respond to the market’s swings, instead of reacting to them. As I mentioned above, the market can be a chaotic environment—and some days are real “gut-grinders.” You feel like your “darned” if you stay in, and “darned” if you don’t.
When you have a risk-management plan in place, however, including protective stops, you can respond to the market’s antics by calmly confirming your stops’ positioning, perhaps raising some of them to protect profits, or even take gains on selected positions.
When we react, however, we usually have no plan for volatile market periods. We may jump around mentally, wondering how, where and when to place stops. I’ve seen some traders in this situation panic, throw up their hands, and sell all their positions, only to rue that decision later.
Think of it this way: Professional football teams don’t run onto the field without a plan. Airline pilots don’t head down the runway without a flight plan. Surgeons (we hope) don’t remove our appendix without a process in place. All of these professionals are well-practiced and know how to calmly respond if situations turn tough. We are wise to follow that strategy.
Third, when we dive into the market without a well-thought-out plan, anxiety and even fear can creep into our thoughts. When we become nervous and unsure of what to do next, our thoughts slide down into the area of our brain known as the amygdala. This segment of our brain only has one goal—survival. If your thoughts fall into that region, they become negative and highly limited. Do I fight? Or do I take flight? Should I sell my positions, or hold them? If I ignore my stops, will my falling stocks ever reverse higher? How much can I lose before I lose my mind?
If you have a process that you follow for volatile markets, and you respond calmly to the events taking place, your thoughts stay in your pre-frontal cortex, behind your forehead. This is the “CEO” or executive-decision portion of your brain. It makes the best, most insightful decisions and directs you to take smart actions. Far from limited, this is the area of your brain that feeds you a wide range of decisions and the best ones for your portfolio.
The following are step-by-step plans that I use, and that I teach to my trading and investing students. (You may want to check out the information at the conclusion of this article for more easy, but in-depth steps that keep you safe and profitable.)
- Before you enter a new position, check out the market’s “mood and manner.” Is the S&P 500 reasonably happy and traveling in an uptrend, or is it undecided and traveling in a horizontal range, or is it sliding south and downright cranky? Remember, three out of five stocks will follow the benchmark index higher, and four out of five stocks will follow it lower. It’s always a good idea to know the market’s environment before you enter.
- Before you enter a new position, it’s a smart idea to assess the sector where it resides. Just as with the S&P 500, you’ll want to know if the sector is in, or out of, favor. These days, it’s easy to evaluate sectors using sector-based exchange traded funds (ETFs). You can find a large selection of sector funds at State Street Global Advisers (spdrs.com) and iShares (ishares.com).
- Once you enter a new position, make sure you have a risk management plan in place. You may want to place a mental or “hard” protective stop with your broker to preserve your capital in case of a drawdown. After all, we buy insurance for our cars, our homes and our health. It makes perfect sense to care for the positions in our portfolios in the same way.
I have set routines for evaluating the market, researching stocks and ETFs, planning risk: reward ratios, and implementing risk management and I teach these routines to my students. Please know these routines are not difficult. In fact, they are simple. But they ensure that when I approach the market, I am focused and organized, I respond to the market’s gyrations calmly and confidently, and my decisions and actions come from my pre-frontal cortex, the wisest area of my brain.
If you don’t have step-by-step processes or plans in place for your market day, take time now to do just that. You’ll be investing in yourself and your portfolios success. And what’s more important than that?
Keep green on your screen!