Investing: A Step-by-Step Trading Plan

Before we start, I have to remind you that this plan may not be suitable for everyone. Why? Because everyone has different circumstances, financial goals and needs. I am definitely not a financial adviser and the use of this trading plan is at your own risk. I am not liable to any poor decision(s) and financial loss(es) you may incur through the use of this trading plan as all investments carry risks. I just share a step-by-step guide on how you can choose your investments if you had the capital. I personally use it myself and this is my own framework of making decisions. I didn’t pay thousands of dollars to learn it from a guru. I spent some time condensing the steps I took for my own investments and humbly share it for those who are newbies. Let’s get started.

1. Decide what you  want to achieve from your investments.

This is obvious to some but at the end of the day, when you make a profit, what do you intend to use it for? Is it for retirement, a down payment for a flat, wedding expenses or your children’s education? There are two ways to profit from investments: capital gains or income. Again, the way you want to profit from an investment may arise from your personal circumstances, your risk tolerance, your amount of available capital and your investment horizon.

Personal Circumstances

Some questions to ask about your current life situation would be: are you just started out working, or are you nearing to retirement? Are you well-paid in your current job or are you living on low income? Do you have major financial commitments like wedding expenses or housing loans to pay or are you one of the lucky few that breeze through life happy-go-lucky? Are you single or married? Do you have children? Will you have an inheritance when your parents pass on, or will you shoulder your parents’ debts? Many factors to consider indeed…

Risk Tolerance

Suppose you had $1000 dollars to invest. When the market crashes, causing your investment to lose 50% of its value, do you:

  1. Freak out, lose many night’s sleep and decide to sell at a loss, or
  2. Hold on to your investments, believing the loss is only temporary, or
  3. Buy more of your investments, believing its a good bargain hunt?

You can ask another slightly different question, like: if your invesments slowly decline in value to 50%, how do you react in the above 3 options?

If 1, you are more risk averse. You should put your money in instruments that has minimal risk of losing its value like Singapore Savings Bonds.

If 2, you are moderate risk-taker. You may put some of your capital in medium-risk products like REITs or blue chip stocks.

If 3, you are high risk-taker. You may put more of your capital in medium-risk products like mid cap stocks, and some into more higher risk products like small cap stocks, forex or options trading.3This is just an illustration on how to allocate your capital based on your risk tolerance. Once again, I am not a financial adviser, do consult one if you really had any doubts.

Available Capital

Clearly a man who has $100,000 to invest can take on more risk than a man who only has $10,000. In my opinion, individuals with smaller seed capital usually seek capital gains to grow their money while those more fortunate folks with bigger seed capital seek income from their investments.

Investment Horizon

A man who only has 2 years to invest his money can take little risk compared to a man who has 30 years to ride the ups and  downs of a bear market.

2. Decide what stock, bond, REIT or commodity you are interested in.

This step is fairly straight-forward. Go to your local stock exchange to look up the ticker symbol for the counter you are interested in.

3. Find out what it’s business does.

You can find more about its business when you click on the ticker symbol in the stock exchange. It is available in the company description section.

4. Categorize if its business is cyclical or defensive in nature.

According to Investopedia, a cyclical stock is one whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession.

And in contrast, a defensive stock is one whose business performance and sales are not highly correlated with the larger economic cycle. These companies are seen as good investments when the economy sours. Definition courtesy of Investopedia.

Personally, I feel that the type of stock you wish to own (if you are planning to own stock), depends on your risk appetite. Suppose you don’t want to ride the ups and downs of the economy, you would choose a defensive stock. If you are up for capital gains and want to time the market to get superior market returns, you would go for the cyclical stock. For me, recently I have chosen some defensive stocks to put in my portfolio as I don’t want to be caught in the wrong market cycle when I make my purchase.

5. Look at the price chart.

This gives you a glimpse of the investors’ sentiment regarding the counter. Is it uptrend, downtrend or sideways? Good for you if its in a uptrend. Best to avoid stocks who have a long term downtrend. If it’s moving sideways, take note of the support and resistance lines. Support lines can be good entry points in my opinion and resistance lines good exit points for investors who want to profit via capital gains. Not to mention the extra profit you get from your dividends if your stock pays one…

6. Is the price at a 52-week low or high?

If the price of the counter is at the 52-week high, in my opinion, proceed with caution. There is only so much the price can move up before it starts to go down. If it is at a 52-week low, you MAY have found a bargain deal. Simply because the price can go even lower. You may have to dig in further to understand what causes the price slump.

7. Go to SG for SG shares and find out analysts target price and reports.

If you just started out researching the stock you want to invest in, is a good place to see what your analysts have been up to. I don’t know what’s wrong with this technique but apparently, some of my friends say that the analysts have an ulterior motive to write those reports. Well, you can always check their disclosure if they own the shares they are writing the report about. That should give you some assurance in the objectivity of their reports. Anyway, while you can find some insights and their opinions on the counters you are interested in, treat it as a guideline. That is my personal advice. Don’t take it automatically that what they say is true, as analysts are human as well. They can be wrong too. I have personally read some reports whose analysts admit that they are wrong in their predictions.

8. Go to the counter’s website and read their most recent annual report.

This is one of the most important steps that I personally feel you should never miss out. Besides analysing the company balance sheet, profit and loss account and cash flow statements, you also get to hear the achievements and challenges faced by the company by the CEO or the chairman. If you are hardworking, you can read maybe 2-3 years ago of annual reports.

9. Google “<your counter name> forum” to check the sentiment of its investors.

It may be true that some negative things the company is facing the management may not tell you directly. What better insight you can gain than through the people who are interested in investing the same counter as you? Of course, user discernment is advised here as these investors are human too. They could be wrong too.

10. After all these analysis, decide if you are willing to take the risks of the current market condition of the counter you are interested to buy.

Investing is both an art and a science. Nobody has the crystal ball to predict what will happen in the next 2 to 5 or even 10 or 20 year’s time. While other people can give you insight or opinion on the counter you wish to invest in, ultimately you must be comfortable to forming your own opinion or judgement. One person may approve of one counter, and the very same counter you can surely find another person who objects to buying it. In the end, its all up to you. Are you willing to take the risk?

11. If yes, buy it.

Pretty self-explanatory.

That’s all people for my trading plan. I hope it  gives you a basic framework on what to buy and what NOT to buy. I wish all of you here to be prosperous in every investing activity you do. Let the money begin rolling in! Haha.

Share, like, comment or subscribe to this post if you liked it. I appreciate your comments especially if it’s to improve on the trading plan I have written on this blog post. Thanks all!

3 thoughts on “Investing: A Step-by-Step Trading Plan

  1. Binyamin

    Great post! It’s easy to read and understand for somebody like me who knows nothing about investing it’s really informative on how i need to plan my steps to start investing.

    Liked by 1 person

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