The first step to trading successfully is understanding the financial markets and how they work. As famous economist Andre Kostolany once said, the relationship between the stock market and the economy is like a man walking his dog. The dog follows his master, and yet is always ahead of him—just like the stock market is always ahead of the economy, because it’s role is to anticipate the future.
During the walk, the dog (i.e., stock market) stops and looks back to make sure the wanderer (i.e., economy) is still “following” and the dog then continues on walking. But, if the wanderer stops, the dog RUNS back towards the wanderer. In a similar way, stock markets often correct FAST to equilibrium, when economic data grow at a slower pace than expected. One should never ignore the underlying fundamental drivers of the markets in which he trades.
Seeing these discrepancies and taking advantage of them is the job of the trader. Trading may be common, but understanding is rare.
The personality of a trader plays a big role. As a trader, you should be able to stick to the following rules:
- Before trading, ask yourself the following questions:
- How much money can you spare for trading? How much money you set aside now will have a direct impact on your trading goals. You don’t need a lot, but you should have a defined starting point. Know your financial limits before you test the waters.
- How much money can you afford to lose? Put aside the money you’re saving for your long-term goals and trade with the rest. You could even trade with the interest you earn on your savings and guarantee your capital!
- How much time can you set aside to study trading theories, strategies, how tos and the market? The more time spent on the front end, the more that opportunities will open up, when you begin trading. Set aside enough time to learn how to trade, not just time to execute the trades.
- How much time can you devote to trading? This may clarify which strategies will work for you. Maybe you have time to watch the opening and closings, but not much time in between. This may close the door on some strategies. Maybe you can trade wherever and whenever—the sky’s the limit!
- Get rid of your fears and believe in the market, even when it looks like it’s the end of the world!
Search for attractive support levels and place your orders beforehand, in order to start building your position gradually. Trading is viewed by many people as pure speculation and a risky investment. Pshhhh! Do they know that the S&P500 is up more than 100% since 2009? How many of them have missed that train? As a trader, someone will tell you every single day “it’s not the right timing,” but actually no one can time the market!!
- Stay down to earth
By realistic, meaning don’t expect to become a millionaire in a flash, as most beginners and amateurs think. Even if you experience beginner’s luck, you could see these new dollars fly away in just one trade, so always beware. Learn to manage your expectations.
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- Set the decision tools you believe in
Everyone has his own strategy and decision tools. For example, one of the most common entry points in financial markets is when supply has been almost exhausted, yet there are still buyers with their hand out, signifying that the price is soon going to go higher.
Say, for example, a purse is trending and its inventory is limited. It’s price will go up, as fashionistas are all willing to pay whatever it takes to buy it and post a pic holding it on Instagram! However, if there is excess supply but no prospective buyers, the price will go down to meet demand: These pivotal moments can be identified on a price chart by studying historical examples. For day traders, we would strongly advise a must read, by John Murphy: “Technical analysis of the financial market”.
- Once you set your strategy & your price targets, STICK TO THEM
Decide BEFORE you trade just how much profit would be acceptable and place a stop loss in case the trade goes south. Place your orders beforehand and don’t amend them, unless there is an unexpected event!
- Correctly assess your risk-reward ratio
Try to “lose small and win big,” as the saying goes, so that you come out on top, even if you have losses over a large number of trades. Say, for example, that you manage to win 5 trades out of 10. If you limit your loss, you may end up winning on the overall position! Your profit will only get better with time and experience.
- Control your emotions: Be patient & disciplined
Successful day traders don’t trade every day. Lack of impulse control could prove to be your trading demise. Getting greedy can leave you holding the [possibly empty] bag for too long, while timidity can cause you to get out prematurely! Amateur traders often end up over-trading and risking too much, because they can’t overcome the temptation. Patience and discipline are the only ways to become successful over a longer period of time.
- Don’t try to continuously average down
Every day trader has losses, so don’t stress yourself when the occasional trade doesn’t go your way. Remember, there is a market every day with a new opportunity and if you get dragged in a position, you will NOT be able to achieve your goals.
- Don’t try to outsmart the market
Never bet against the momentum, except for very extreme moves and exceptional situations. Try to find strong trending moves supported by high volume and ride the trend until it exhibits signs of reversal. Imagine the market as an unstoppable wave—and you are the surfer. Don’t fight the wave. Traders greater than you have tried and failed. Learn from their mistakes. You should know your adversaries and recognize that you are playing in the same league as the best professional players in the world. You should also understand that the only way for you to make money trading is to out-play these top professionals who may be much more exposed that you are.
- Don’t listen to financial media
Well, you should listen… just don’t buy it all, hook, line and sinker. If you’re looking to be a wise investor, the first step you should take is to understand the majority of what you hear in the financial media, which is noise that could lead you to make large errors.
At times, the financial media will be right. A broken clock is right twice daily. Ignore it, nonetheless. Do your own work. There is no way to know ahead of time which financial media news will be right. And, when financial media is incorrect, it could cost you a lot more than what you made in the few times that they were right.
In order to achieve your goals as a trader, you have to be disciplined and limit your interactions with the market. Most traders KNOW this, but can’t DO it! Everyone knows that exercise is good for you. But how many people follow through and actually do it?
Even the smartest person knows they shouldn’t itch those bug bites until they bleed. But, only a handful can resist! So, just because you know HOW to trade, doesn’t make you a good trader. You also have to have the proper habits and discipline to carry them out. Traders may know that they should wait for the right opportunity, but some just can’t resist riding that ill-fated wave. It isn’t that they aren’t smart enough to understand how to trade properly….it’s that they just don’t DO WHAT THEY KNOW NEEDS TO BE DONE.
It’s all about trading like a sniper, instead of like a machine gunner.