The ratio of income and expenses - the importance of planning
Who needs profit/loss planning, or revenue and expense planning? Isnt investment just about buying low and selling high?
It would be nice to always buy at the bottom (cheap) and sell at the top (high), but this is nearly impossible to achieve consistently and consistently. In addition, investors are people too: since no one wants to lose, it means that emotions influence our actions and conclusions.
Losing money in securities is not only bad for our wallets, but it will also hurt our egos.
Over and over again, investors make a profit by selling securities that have risen in price, but again and again they hold on to falling stocks in the hope of their recovery.
So how can an investor avoid this situation?
One solution is to learn how to be a disciplined investor and adopt a profit/loss plan. In this article, well run through this stock market strategy and show you how to use it to stay profitable.
What is a P&L plan?
Profit-loss planning is a step that most private investors and even professional traders often skip.
Profit/loss plan is a set of parameters that determine the maximum damage and, accordingly, the profit that an investor will derive from the sale of securities, i.e. when closing positions.
Recognizing losses (writing off losses) is an extremely important part of an investors job. Therefore, the profit / loss plan is extremely important for any investment strategy.
We all make mistakes when choosing securities, most of the investors have experience of losing money on the stock exchange. Great investors have made mistakes too, but what helped them achieve unique results?
An important point was their ability to recognize their bad choice in time. The Profit-Loss Plan will help you to admit your mistakes, giving you the opportunity to separate emotions from the investment process.
This approach can be compared with the work of an ordinary company. Just like ordinary people, companies have financial problems. And if the management of companies does not want to take these problems into account and take them into account in their activities, there may come a time when, apart from the liquidation of the organization, there are simply no other options left.
If you dont think too hard about your profits, but simply see it as a means to increase your cash flow (not your ego), then you will be much easier to manage your emotions and achieve better results.
Creating an individual income-loss plan can be more difficult than it seems at first glance.
You will need to set the maximum gain you will accept and the maximum loss you will tolerate on your investment. But these highs and lows do not have to be the same for every trade.
For example, it is unlikely that blue-chip stocks with high dividends are likely to rise or fall by more than 10% in any given year. And the prices of shares that are less reliable can vary in a much more significant range.
In other words, you have to analyze each stock individually to estimate how much the price of it can change in any direction. Some investors use technical or fundamental analysis, or a combination of the two, to determine appropriate limits for profit and loss.
Personal business plan
Your risk tolerance, which depends on factors such as your personality, the time range of transactions and the size of your personal capital, is in many ways the determining factor, based on which you will have to develop a business plan for forecasting your possible profits and losses.
Typically, people who are risk averse will have narrower boundaries than those of people who are risk averse.
Risk lovers will try to profit as much as possible from rising stock prices, but a more conservative investor may sell stocks at the very beginning of their rise in value to eliminate the risk of losses that would occur if the stock suddenly began to fall in price.
If you prefer to avoid risks, a profit/loss plan of around 10% per trade may seem too risky for you. On the other hand, if you are willing to take on the additional risks associated with potential profits, a 10% profit margin /loss might be appropriate.
Once you have chosen your numbers, using either a conservative or aggressive approach, you must put the plan into action by removing any obstacles in the way of its implementation.
Remember, this plan has two requirements: you must sell your shares (1) if they fall to a certain level and (2) if they rise to a certain level.
Naturally, brokers will not allow you to place two different orders to sell shares at the same time for security reasons. Therefore, you will have to decide which of the limits is more likely to be reached.
It may be wisest to place orders that protect you from excessive losses. Many wise investors use a stop-loss order that instructs the broker to buy or sell a stock once it reaches a certain price.
A stop loss order guarantees (if it can be filled - but more on that in other articles) that you will not go broke in a falling market.
This is especially important if you do not have the opportunity to watch the stock market every second.
Having set your stop loss at your maximum loss percentage, sit back and wait. If the price goes up and crosses your profit line, do not close the bet, but immediately move your loss order to this place. If the share price falls further, the stop order will be executed, but instead of losses, you will receive the planned profit.
Once you have your P&L strategy in place, you will need to remember that the whole point of a plan is to set strict guidelines for when to sell a stock.
It sure hurts to see a stock continue to rise in price once youve sold it, but its often better to sell it when its up rather than waiting for it to crash after the high. Sir Joseph P. Kennedy once said, "Only a fool holds out for the top dollar".
It must be taken into account that all the figures given in the article are nothing more than generalizations. Developing your plan requires detailed research, analysis, self-assessment, and a realistic view of things.
Setting a return cap of 100% doesnt make sense if youre investing in low-risk companies that grow at a steady 15% annually.
Here are some things to remember: A 50% drop in the price of purchased shares means that you will have to double your money to get back to the amount you originally invested.
Loss management is the key to success in the investment field. Making mistakes is part of human nature. Once you understand this, it will be easier for you to move forward.
Purchasing shares for the long term does not guarantee you a profit. The buy and hold strategy only works if you have chosen the right stocks.
Remember, the most important part of a plan is sticking to it!