Since early December 2008, the stock market has been essentially flat. Of course there have been ups and downs, but if you look at the 40 day moving average, it’s pretty flat. That means that the people who are making money are the day traders because they react quickly to the daily ups and downs in the market. The big question is what happened to your investments between June and December?

This is a good time to look at your entire relationship with the market. It doesn’t matter whether you trade stocks, options, commodities, or even Forex. It’s a good time for a little self reflection. First, ask yourself why you trade in the first place. Why do you use the strategy you use? Maybe your strategy is to hand your money to a major broker like Smith Barney, AG Edwards, Fidelity, or any of the others. Does that mean that your main strategy is to not deal with investing… to just give your money to someone else and let them hopefully make money for you. This is sort of an ignore it and hope it will grow strategy. Maybe your strategy is to put your money with a company like Scottrade, eTrade, or Ameritrade and actually make the trades yourself. Are you doing that for the thrill of winning and losing kind of like gambling? Maybe you do it to have something to impress your friends with. It’s really critical that you understand your motivations beyond the knee-jerk response of wanting to make money.

Once you figure that out, it’s an excellent time to see that you trading house is in order because the market will not stay flat forever. Now is the time to put together a winning trading methodology. Get ready for the upturn in the market. Here are a few tips.

No matter what your motivation is for trading, you’ve got to get your emotions out of the picture. If you get excited when you win and sink into the pits of depression when you lose, then you will discover that you lose and lose and lose. Really, this emotion-based trading is a lot like a compulsive gambler. So put on your Mr. Spock the Vulcan mind and get your emotions out of the picture.

Now that you are clear about your motivations and have your emotions out of the picture, decide on your goals for trading. Here are some things to consider. How much time are you willing to invest in your investments? How much annual return do you want to make on your investments? How much risk are you willing to take on the money you invest… in other words, how much are you willing to lose? How much are you willing to spend on learning to invest? Come up with a statement of objectives in the form, “I am ready to invest ­­____ dollars and I am looking for a ____ percent annual return on my investment where I spend ____ hours per week/month managing my investments after spending _____ learning how to invest.”

Next you need to do some reality checking on your goals. If you are looking for a risk free investment returning 100% annually, that is not likely to be found. This reality checking phase is also a good time to evaluate how your past investment strategy has met the objective.

Next, come up with your overall investment strategy for moving forward. Are you going to put your money in a bank? Are you going to put some money into guaranteed municipal bonds and some into mutual funds? Get specific about how you intend to reach your objectives.

Before you actually invest a dime, you need to have an investment plan. The investment plan defines when you will actually put your money into an investment and when you will take your money out of an investment. For example, if you are investing in a stock, then this plan will tell you when you should invest in the stock. What value should it be at? What should it’s recent history look like?  Does the performance of the stock meet certain technical analysis criteria? Does the company meet some fundamental analysis criteria? Your plan should also tell you when to sell the stock. That tells you the risk you are taking. If you purchase 100 shares of a stock for $50 and are only willing to risk 100 dollars, then you must exit if the stock drops by $1. That’s not a very good plan, but it gets the idea across.

Many people don’t think they need a plan for things like mutual funds or 401K plans with their company. Frankly, those are the people that lost the most between June and December 2008. The plan that you make should get you the results that you seek in terms of ROI and risk. That’s why it’s called a plan.

Now, the trick is to follow the plan no matter what happens in the market… and this is where the Vulcan mind comes in. If you made your plan correctly, then if you follow it to the letter you will get the results that you seek. It’s really strange though, how most people stop following their plan. In the example above, if the stock drops by $1, then instead of selling it according to plan, they think it is bound to rebound. They hold on to it and it goes to a $2 loss, then a $4 loss. Pretty soon they have lost way more than their risk plan called for. Sound familiar? The winning technique consists of three steps. Follow the plan, follow the plan, and follow the plan.

After you exit the investment, then you need to do a de-briefing in your own mind. Take a look at what happened, how your plan served your objectives, and what you could have done better. With this simple analytical approach to investing you will be much more successful no matter what your overall investment strategy.

There are plenty of courses available to teach you investment strategies and plans that work. EABW will be listing some on our Resources page.

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