When trading stocks, trading shares, or any financial instrument on the stock market, a precise share trading plan can increase profits and reduce risk.

If online trading, day trading or managing a long term investment portfolio, profits can be increased by implementing a trading plan. Develop a trading plan based on individual trading styles, the types of instruments that will be utilised and the current stock market movement. Here are some of the most important rules to include in a trading plan:

Diversify The Share Portfolio

Never put all of the eggs into one basket. Divide the available trading capital into 10 portions and ensure each trade is limited to that amount. As the trading account fluctuates, so will the value of each trade. "Diversification is perhaps one of the most important tools available to investors to reduce the overall risk within their portfolios".

Set a Stop Loss

Always place a stop loss order when opening a position on the stock market. A stop loss is an order placed at the time of opening a position that will ensure the broker will close the position at the set limit. Determine what effect a loss will have on the trading account and adjust the stop loss order accordingly. A 5% loss is reasonable however, ensure that the loss percentage is 50% smaller than the profit target.

Take Profits by Setting a Stop Profit

Determine a profit target and place an order at the time of opening a position that will ensure the broker will close the position when a profit target is reached. This is particularly important when day trading. A reasonable profit target is 10%.

Never Allow a Profit to turn into a Loss

Set a profit protection stop. Determine a level of the unrealised profit that would be painful to lose. Do this by moving the Stop Loss order level as the open position moves in the trades favour. When doing this the profit target may be increased if the position is moving well in favour of the trade. Online trading platforms provide tools to assist with this.

Technical Analysis

Include at least three technical indicators in the trading plan and detail the entry and exit strategies. There are many indicators however, ensure that the plan includes indicators with differing information. For example volume analysis, moving averages and candlestick charting. It is important to technically determine which direction a stock or market may move.

Never Take A Tip

Tips are someone else’s opinion of the share market. Analyse the tip if it sounds promising, but base any decision to trade the tip on the trading plan. If all criteria are met, then place the trade.

Keep A Trading Diary

Record keep is critical and is an excellent learning tool. Write down trade execution, exit strategy and profit or loss ratio. All information relating to the trade can be reviewed in the future to determine if the trading plan is successful or if it requires more work.

Keep the trading plan simple and execute the system all of the time. Be consistent with all aspects of the plan and this will assist with risk management and increase the profitability of the share portfolio. Good records will determine if the trading plan has a positive expectation or if some changes will ensure that the share trading account becomes more profitable.