Develop Your System Before Investing Money in Stocks

By Praveen Puri

Does this sound familiar?

“I don’t know why I bought it…my adviser just told me to.”

“I’ll get a stock tip and then buy it at $34…and it will go right to $29.”

“I’ll buy a stock at $45, and it’ll jump to $48! I’ll excitedly sell…then see it go to $65.”

Most investors “dabble” in stocks and settle for inconsistency.

That is not how it should be. An investor needs to create a fully repeatable stock market business. Any trading decisions that need to be made should be worked out before risking real money.

At a minimum, an investor needs to have procedures for:

* selecting stocks

* buying initial positions

* adding to existing positions

* handling losing positions

* taking profits

After developing an initial set of procedures, the investor needs to test the procedures through back-testing and paper trading.

He or she should test different stocks, from different industries, and under different market conditions. The testing will provide feedback for tweaking the procedures.

The investor should continue the cycle of testing and procedure tweaking until he or she is completely comfortable with the system’s performance, results, and risk-reward profile.

At this point, the investor can finally enter the trenches and start to buy stocks – and the hard part begins!

Even with a well-developed system, human nature will tempt the investor to deviate from the plan. The investor’s mind will keep saying things like, “the system is too simple, not lucrative enough. I need to adapt it to futures. I need to make it work with options, then I’ll be all set! I could get rich faster if I just do this, or do that…”

The investor must focus on the process – not on results, fear, greed or return. Simply follow the procedures.

Above all, the investor must not improvise during an actual trade. The business of investing should be boring and repeatable – not a seat-of-the-pants adventure!