Three vital parts to every trading plan

Mind and Money

Each trading plan should comprise three sections that are interrelated. These are

  1. Method
  2. Money
  3. Mind

I have been doing seminars on stock trading for many years. I know that when I mention 2 and 3 for more than a few minutes the audience eyes glass over. When I keep the conversation on the method, and especially entry points, the audience is attentive and eager to learn.

The same goes for most of the text books on trading. The authors know well that if they focus on 2 and 3 that the book simply won’t sell.

How VectorVest addresses the 3 Vital Parts to every trading plan

At VectorVest, we believe in buying undervalued shares with outstanding earnings growth that are rising when the overall market is rising. VectorVest does all the heavy lifting of assessing and calculating the fundamentals surrounding valuation, earnings growth and earning safety. The VectorVest Worry-Free Investing plan (WFI) is a great place to start your trading/investing business. The rules are fully disclosed and have been tested over the last 26 years with great results. The WFI can be kept under control in a few minutes a week and can fit into the busiest of schedules. That’s section 1 above taken care of.

Money management is quite easy except few pay the concept any attention. It simply says that the most you should lose if the trade/investment goes awry is 1% of your account size. Here the first question you need to answer is “How much money is in my account”?

Few can answer this. If you don’t know how much money is in your account, then you can’t size your positions correctly and if you cannot size your positions correctly, then you are gambling and not trading.

If you have 50000 pounds to start your trading/investing business, then 1% of that is 500 pounds. You should not lose more than 500 pounds in any single trade. Don’t stress if it’s a little more or a little less. That won’t kill you. It’s losing 25% of the account that will kill you both financially and emotionally. There is a big paradox here. You have done all the homework. The share looks excellent both fundamentally and technically. The devil on your shoulder says “hey it’s a sitter, let’s have a big punt”. The reality is that if you have a methodology that’s correct 80% of the time, then it is wrong 20% of the time. On the next trade you don’t know whether it’s one of the 80 or one of the 20.  The market cannot be predicted on a trade-by-trade basis. Over a batch of trades there is a massive edge but on a single trade NO ONE knows what’s going to happen next.

Built into the VectorVest program is the excellent “Successful Investing Quick Start Course (SIQSC)”. In lesson 2 of the course, the simple math of position-sizing is covered in detail with many examples. This calculation will keep you alive in the financial markets.

Play the game of trading and investing

With that done the only barrier remaining between you and the unlimited wealth that the stock market can give you is playing the “game of trading and investing”.

This is much more difficult than it sounds. There seems to be more trading psychologists around these days than traders for that reason. I am reminded of a story in the Economist a few years ago which reported on deaths of elderly people caused by burst pipes during a cold spell. The Economist concluded that in London it was easier to find a psychologist to talk you through the trauma than to find a plumber to fix the pipe.

Again, the WFI method is a great place to start to build experience. It only invests in companies that have an excellent record of making money year in and year out. When the overall market is rising, then there is a very small probability of a surprise in earnings. It can happen but it’s unlikely. The WFI will allow you to make money and build the belief that “I am a consistently winning trader”.

It’s still going to take some effort to follow the rules to the letter. I normally set new traders a goal, to grit their teeth and follow the rules to the letter, for a batch of 30 trades. It rarely takes that long to build the habit. After around 5 to 8 trades, a new neural pathway has been built in your mind using a concept that psychologists refer to a “neuroplasticity”.

You are 8 trades away from being the trader you want to become.


—David Paul

Jan 26th 2018

One thought on “Three vital parts to every trading plan

  1. Some wise words David.

    I certainly enjoy the trawling for good shares and after 23 years of TA am pretty damn decent at it, but the emotional and discipline side of trading is a different matter! Retirement, nearly 10yrs ago, caused the well known trauma which retirees are often warned about….the sudden loss of work-place camaraderie etc.

    Although you can have a very FULL (Fool’s) life with many, many interests (and I’ve got TOO many), the sudden loss of camaraderie and working routine and the extra time I had available led to me over-trading….just for the pleasure and excitement which compensated, to a degree, my new situation. Even after reading dozens of books over the years, warning against over-trading, it caught me out. Strangely, the increased availability of time also appeared to reduce my focus!!! No I don’t understand it either!

    Over-trading and lack of discipline topped with some jaded complacency hurt my capital. This was in spite of having read DOZENS of books over the years. I am now re-reading many as I became too lazy and unfocused to bother, preferring to concentrate on the undoubted fun of the hunt and the kill rather than re-visiting the important but boring matter of record keeping and the discipline required in trading/investing.

    I think that the discipline of working to a routine such as offered by software like Vectorvest and similar UK copies, can be a steadying hand……the trouble is that Vectorvest isn’t cheap so that it’s ANOTHER £500/ yr you have to make before you’re in profit; on top Stamp Duty, Spread and trading commission (DeGiro, here I come! 🙂

    Of course, as ageing continues relentlessly it isn’t sensible to take a ‘long term’ view, as that becomes increasingly unrealistic 🙂 not that I was ever a long term investor at any point!! 🙂 So, for me, it’s a matter of refreshing my knowledge of the psychological and money management requirements of the ‘sport’ before returning to the fray!

    Onwards and downwards….sorry, UPWARDS!! 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *