Build your investments like building your house.

Build your investments like building your house.

Building a house is not so different to building your investment targets and portfolio. When you build a house you first lay the foundations to hold up the four walls of your house. When investing, consider education to be the foundation holding up the four walls that will be the key to your success. These four walls are:

  1. Method
  2. Money
  3. Mind
  4. Map

In this article we’ll discuss the four walls that hold up your investment ‘house’. Whether you are self-taught or decide to take more structured training – to develop your talents to the fullest and realise your earning potential it’s necessary that you cover all these four areas.

 

Method

There are different ways to trade the financial markets. You might be an aggressive intraday trader looking to achieve earnings within one day, or you might be an institutional investor and prefer to spread your gains over a longer period of time based on the macroeconomic environment. To develop your ‘method’ you will need to understand the behaviour of the financial markets, know about price action, and be competent in using charts and conducting technical analysis. Once you have a good handle on these basics, you begin to practise trading and begin to define and refine a method that works for you. The aim is to develop a method that you are comfortable and confident with. As your skills and competence grow you’ll come to develop more than one method so you can pick and choose which is best under different market conditions.

 

Money

Learning to manage your trade capital is one of the linchpins to being a successful trader. To protect your funds and limit the amount of potential loss, ensure you use a stop order. Placing a take profit order is also recommended as you will see in the section on ‘map’. Make sure you understand how to calculate both stop loss and take profit orders based on the other parameters of your trade (how much you plan to invest, the volume of your trading). Most traders simply fail as they don’t put good money management into practise. They don’t plan ahead what they are willing to risk, or even work out basic entry and exit points, or if they do, they don’t stick to the plan.

 

Mind

Developing critical thinking and having a broad knowledge is crucial to operating successfully in the markets. One of the most common factors holding investors back from making the money they could truly be making is their own mind. Without the right attitude, mind-set and discipline, all the best laid plans can quickly become meaningless. When fear or greed take hold, bad decisions can quickly take over. Developing the mind-set required to trade prudently and successfully is easier said than done. You need to be disciplined and grow your problem solving skills in the case where your trades don’t go in the direction you anticipated. If you’ve developed your method and put your money management practices into place then trust them. Refine and change them when you have the benefit of hindsight. Learn to think, decide and act using impartial, non-emotional judgement.

 

Map

What is the first thing you do when you build a house? You draw up the blueprint or the plans to the house. In fact your draw up more than one plan, you have your building plan, electrical plan, plumbing plan and more. Your trading plan is the map you will follow when you enter the markets. Your map sets out your goals and the route you will take to achieving them and will outline the other three M’s we’ve covered above – method, money, mind. First decide on your ‘method’ – do your analysis, work out what instrument you will trade on which market, decide on your entry point (the price rate and time) and also plan your exit strategy (at what price you will close the deal). Next, work on the ‘money’ aspect of your plan by ensuring you’ve put your risk management in place with stop loss and take profit orders – setting these in place will particularly help you with the ‘mind’ aspect. Now review your ‘map’, have you set realistic goals and objectively identified your trades? Have you conducted thorough analysis? If not then you are not trading, you’re gambling. If you’re ready, then go ahead and enter the market and don’t forget the ‘mind’ – trust your plan and stick to it.

The financial markets are impersonal, dynamic, profitable, risky, fun and the master of no man. People are often so excited to get into the markets that they forget to carry out some or any of the steps above. You wouldn’t leave out one of the walls when building your house, why would you miss one of the ‘walls’ integral to your investing?