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Personal investment plan

Construction of a personal investment plan

Investors do not plan to lose, but they lose, because they do not plan "- this saying illustrates how important the preparation of a plan is. The investment plan is a kind of a signpost for the investor, who thanks to it knows how to move around the market.

Trading as a business

Regardless of whether you are talking about long term investments on the stock market, short term contract and Forex games, whether it's just a hobby or a source of income - it's worth considering trading on the markets as a business.

Although similarities do not seem to appear at first glance, there are many. When establishing a company, a start-up is drawn up at the beginning of the business plan, which defines its business objects, short- and long term objectives, as well as specifies the costs and the method of financing.

The same should be done by starting your adventure with the financial market, although instead of constructing a business plan, an investment plan is being drawn up. The other elements are analogous - the investor must know why he invests and what are his investment goals, what capital will be involved, what the maximum allowable loss will be, it is also important to choose the market and the investment strategy and system, which will determine the moments of entry and exit from the position. All these factors are also dependent on the investor's knowledge and investment style as well as the market analysis methods used.

Why is an investment plan needed?

Before describing the components of a good investment plan, it is worth explaining why it is presented as necessary for each investor.

First of all, the plan aims to eliminate ill-considered occupancy of a position, which is usually performed under the influence of temporary emotions. Emotions are an inseparable element of speculation - people often succumb to greed, fear, euphoria or illusionary hopes (e. g.,"I will not close my lossy position yet, because maybe the market will turn back").

The ease of opening an investment account can only exacerbate the tendency to act without a plan and under the influence of emotions. It should be emphasized that the plan is not intended to completely eliminate emotions (unless the Investor decides to use a mechanical trading system).

The plan is only intended to limit decision making based on these emotions. It is believed that failure to comply with entry and exit rules and capital management is one of the most dangerous errors that can be made on the market. Avoiding such mistakes helps to create a market advantage and significantly reduces potential losses.

Secondly, having a  investment plan makes it easier to measure the effectiveness of transactions. If the investor quotes losses, it means that his  investment plan has errors or that the investor does not adhere to the  investment plan. In this situation, it is possible to check which elements (in particular the adopted strategy and rules of capital management) fail, and then to correct them or return to enforcement of the  investment plan. However, if the investor does not have a prepared plan, he/she may not be able to determine the reasons for the incurred losses.

Of course, having a  investment plan does not guarantee success. However, a good  investment plan, if strictly enforced, will help reduce losses and allow the investor to stay in the market for a longer period of time. This is particularly important in the futures and Forex markets, where leverage is used - here loss-cutting is the key to success.

Maintaining loss-making positions can quickly lead to a loss of the entire capital (the situation will only occur after the company's bankruptcy). Importantly: the  investment plan is not intended to predict future stock prices or exchange rates, it is intended to help the investor to control himself and react appropriately to price changes, regardless of their direction and strength.

Elements of the investment plan

At the beginning of the investment plan, it is necessary to define its most important components in order to ensure that none of them will be missing in the plan. The six necessary elements of the investment plan are described below.

1. Evaluation of own capabilities

This is the most important stage and the basis of any investment plan. It is worth considering the available resources (capital, time and skills) - it is necessary to adjust the plan to the investor's individual capabilities.

  • Owned capital

Money is the backbone of the financial market - it is a truism, but the investor has to determine how much money he will spend on investments and from what source. With $1000 you can enter the stock market, although it will be an educational investment.

However, this is not enough to invest on the futures and Forex market (unless the broker has microcredits in its offer). On the other hand, if you have $100,000, you can get involved in several markets and diversify your portfolio well.

The next issue is personal finances. When investing in the financial markets, you will have to take into account the possibility of losses. The investor should therefore ask himself what loss he can afford.

If he has a stable source of income and intends to invest only part of his savings, he will not feel as stressful in the event of a drop in the value of the investment as a person who only lives on trading or invests borrowed capital.

It should be emphasized that every investor must face a risk of losing the invested capital. When you start your business on the market, you have to ask yourself first of all:"how much I can lose?", and only then do you think about the profits.

  • Time at hand

Time is the second, very important resource used for investment and speculation. Not everyone can afford to spend the whole day before the charts. The employee will not have time for day-trading. Also, when investing in the long term it is worthwhile to spend at least 15-30 minutes on a daily analysis of the situation after the session. It will also take time to develop knowledge of the stock exchange and market analysis methods.

  • Skills possessed

If the investor has capital and time to invest, he should assess his skills.

There are several points at stake. First of all, it is necessary to be aware of one's knowledge of the market and the methods of analysis used. The investor should also consider how to approach the investment. Whether it treats them as gambling (as a source of quick and risky profit) or rather as a business project in a way (with specified risks, agreed objectives).

This is important because it is said that investors rely mainly on their confidence in the market. At this point it is important to mention once again the emotions accompanying trading - the investor should realize how he reacts to market events.

It is also a good idea for him to know his strengths and weaknesses, especially when it comes to patience, perceptiveness and discipline. Thanks to this, it will not be emotionally responsive and the entries and exits from the position will be made on the basis of a thorough analysis.

2. Determination of the investment objective

The second point of the plan construction should be to define the investment objective. Setting targets is not only necessary in the construction of the plan, but also serves to evaluate the effectiveness of the investment plan at a later stage.

3. Market choice and analysis

The next step is to choose the market and instruments that will be invested in. This also involves choosing the preferred method of analysis - for example, daytrader will use technical analysis and macro data entering the market, while long-term investors will focus more frequently on the fundamental situation of the company or currency.

Of course, choosing an investment style is also associated with the aforementioned goals, time, money and skills.

4. Structure of the capital management system and rules

The system should be at the heart of any investment plan. This is a set of rules concerning the closing and opening of positions, the size of such positions, the frequency of trading and the conditions under which the investor should refrain from trading.

This is complemented by the principles of capital management, i. e. the method of determining defensive stop-loss orders and orders to realize profits, as well as possible rules of pyramidising or averaging positions.

The construction of the system is closely related to other elements of the investment plan. For example, another capital management system and methods will have a daytrader and another long term investor.

Before using the system in practice, it is worth testing it to assess its effectiveness and profitability. For this purpose, you use demo accounts where you can play virtual money.

5. Daily discipline

One of the elements of the plan should be a list of activities to be performed by the investor on a regular basis. Respecting this list helps you develop a discipline in your daily market analysis and plan implementation.

It could look like that, for example:

  • Analysis of the transaction from the previous day and checking the situation on the instruments for which the investor has open positions;
  • Getting acquainted with the available market situation reports to see what sentiment prevails (whether market participants forecast decreases or increases);
  • Checking the publication dates of key macroeconomic data that may affect the market situation;
  • On the basis of the above analyses, drawing up a list of instruments which are of interest to the investor.

Daytrader can also prepare a specific action plan for the whole session.

In order not to get lost in the maze of information, it is worth keeping an investment log. The investor may list details of the transaction and the reasons for which he entered into it. This makes it easier to draw conclusions later and learn from one's mistakes.

6. Motivation

At the end of the investment plan, it is worth to include several aphorisms of well-known investors or generally accepted market principles in order to strengthen one's own motivation. On the other hand, it is also good to write down the most frequently committed errors, so that they are never forgotten.

At the end it is worthwhile to raise one more issue - once again a specific plan (and thus the investor's capabilities, investment goals, the system used) may change. However, these changes should be well thought out and not too frequent.

As new experience is gained and the investment strategy becomes more effective, the investor can increase its capital and the number of markets in which it trades. It should also improve its investment plan in order to adapt it to a constantly changing market. However, the most important principle should remain unchanged - to always follow the investment plan.


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