Before you start trading, it’s critical to create and commit to a strategy. Without a strategy and the discipline to stick to it, make no mistake: you will fail.

Having a clear goal, then tracking your progress toward it, is essential to successful investing. A strategy therefore has two parts:

1. Identifying the mix and characteristics of the investments you want to trade.
2. Determining the process of managing those investments, including exit points and rebalancing.

The first step in shaping your strategy is simply to “know thyself.” You must consider your specific behavior and your intended investment portfolio in order to know when and why you’re trading. Again: If you don’t do this, you will fail. To create your strategy, follow these steps:

Know your goal. Start by asking yourself: Are you trying to save for a new car, your retirement, a child’s education, or simply to accumulate as much wealth as you can? Each of these will result in a different strategy, because each has its own unique characteristics—differing timeframes and differences in the degree of acceptable risk, for example. And these unique characteristics will produce a different portfolio. So you need to know whether you’re investing for the long term or trading for the short term.

Set targets. Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? How much of your portfolio should you risk on any one trade? Set profit goals—in dollars or as a percentage of your portfolio—and evaluate them regularly. To read more about risk, see the section Get Started: The Basics > What You Need to Know about Risk.

Choose an exit point. Your strategy must include an exit plan. Don’t just know your buy signals—know where to exit. Know how much of a loss are you willing to take, and stick to the plan. Don’t stay put because you’re down and don’t want to take a loss. Are you watching something that you know is happening in three days? Then confine your trading to that timeframe and event—don’t stick around in the position afterward, becoming an inadvertent long-term investor and taking a loss. Limiting losses is a key part of ending up by making a profit.

Just as your goals will—and just like the markets do—your trading plan should evolve and change. Evaluate it regularly, and make sure it reflects your goals and your trading style.

Read more:

Investing With A Purpose
Setting goals is the first step in determining which investment vehicles are right for you.

Ten Steps to Building a Winning Trading Plan
It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.

A Look at Exit Strategies
Avoid taking premature profits or running losses by setting appropriate exit points.

Losing To Win
Adopting realistic win/loss expectations is essential to staying in the trading game.

The Art Of Selling A Losing Position
Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider.