Legendary American trader Jesse Livermore known for both his colossal gains and losses in the market once famously said: “There is no bull side and no bear side. There is only the right side.” What Livermore meant by this phrase is that the key to trading is to stay on the right side of market momentum.
Trading is a complex game and many fail because strategies fall short of adapting to market conditions. Whether you trade stocks, bonds, exchange-traded funds or commodities the rules of the game are the same – it's not about what you trade, but how you trade that can make all the difference. Can you break from the herd of wannabe traders and achieve long-term profitability?
Have a look at these tips that will help you stay in the winner’s circle.
Tip 1: Have a plan and stick to it
Trading can be a risky business, so jumping right into it might not be the optimal move. Before you even attempt your hand at it, you need to answer the following questions; what to trade? – when to trade? – how to trade? – why to trade? With this in mind, you should always craft a trading plan. This should include a set of rules that determine your entry and exit strategy, in other words when to buy investments and when to sell them, as well as how you should manage your money, but ultimately, it should enable you to achieve good returns while managing risk. You may also want to include specific rules about the level of exposure you want in particular sectors and asset classes, while you should also consider including a set of long and short-term goals.
Once you have crafted a solid plan, make sure you stick to it. Taking trades that do not comply with your plan is considered poor strategy and if you break the very rules you have set, you’re opening the door to even greater losses.
Bonus tip: Ideally before you even begin outlining what you want to accomplish and setting your rules, you should consider examining your personal finances. To trade you’ll need some extra cash unless you want to risk the money you have set aside for other important goals.
Tip 2: Protect your funds
Successful traders constantly have capital protection in mind. The main reason for this being so is that saving a substantial amount of money so that you’ll be able to trade takes both effort and time, so you must be clear about how much you are willing to lose right from the outset. This should include how much you are willing to lose per trade, how much you are willing to lose in a day and how much money you are willing to lose in the long-term.
Although losing trades is unavoidable, protecting your capital means preventing yourself from taking unnecessary risk and doing everything in your power to preserve your trading business. A good rule of thumb is to never risk more than 1% of your money on any given trade. This means that if you have an extra €50,000 to trade with, you should never lose more than €500 in any single trade. Risk only what you can afford to lose.
Bonus tip: Never mix money allocated for important expenses with that dedicated for trading. These funds should be kept separate and never borrow money for the latter from the former.
Top 3: Use stop-loss orders
Designed to limit an investor’s loss on a security position that in all likelihood is set to make a negative move, a stop-loss order is an order placed to buy or sell once the stock reaches a certain price. Think of it as a type of insurance policy. Your stop-loss can be set according to certain events or affordability, while it can be placed for individual investments or your entire portfolio. So if, for instance, you have set up a stop-loss order for 10% below the price at which you purchased the stock, then your loss will be limited to this percentage.
Using a stop-loss can relieve you from the stress of losing large amounts of money on any given trade. But there is another advantage to this. By having a stop-loss order in place, you don’t need to monitor your holdings on a daily basis.
Tip 4: Know the markets inside out
From news events and economic trends to world politics, all can have an impact on the markets. Understanding their dynamic environment, how they work and all of their complexities is an ongoing and lifelong process but makes trading in an informed way much easier than it once was. The more you educate yourself about investments, the smarter you trading moves will be, since hard research allows traders to better understand the facts and sharpen their instincts. Make sure your read financial news, independent white papers and reports on relevant trends, economic indicators, financial documents including balance sheets and annual reports, as well as any books on investing you can get your hands on.
Tip 5: Craft the right strategy for you
Trading is not the time and place to cut corners. If your competition spends several hours perfecting their strategies, it is highly unlikely that throwing blindly a few darts will see you walking with a profit. In contrast, taking the time to select a solid trading methodology based on sound facts will make the process worthwhile and it is this that should dictate the way you develop your trading plan.
If you’re relatively new to trading, stick to one single strategy that you know works well and discover all its ins and outs before you move on to another one. For instance, scalping is a trading strategy designed to create profit from minor changes in a stock’s price and it relies on technical analysis for execution. Attempting to become a jack-of-all-trades may see you ending up being average at several strategies at once. But this doesn’t equate to trading a random strategy you have just discovered. Spend time to learn everything about it and build a trading system. In this manner, it will give you an edge in the markets, but remember that no trading method is foolproof.
Tip 6: Be realistic and know when it’s time to stop
Discipline comes a long way with trading, while part of becoming successful is understanding when it’s time to cut your losses and step away from the trading platform. If you have come to realise that you are consistently and regularly losing money and are trading with little to no success, then perhaps it is time to give trading a break. The same applies if you are unable to follow you plan. This could perhaps serve as the ideal time to re-evaluate it and determine whether changes to the markets may have affected your plan.
On the other hand, knowing when it’s time to stop trading does not necessarily go hand in hand with losing money. The time may also be right to stop if you have accumulated a substantial sum of money and have achieved all your financial goals. Continuing to trade after reaching financial security could mean that you are potentially putting your nest egg at risk.
Bonus tip: Unfortunately, losing a few trades every now and again is expected and to a certain extent, it is a natural path to success, since every trading loss comes with a market lesson. Accept these, take the time to recover and reorganise yourself. Then come back to the market with a fresh mind and a new perspective.
Setting realistic goals in essential to keeping trading in perspective. Many traders get caught in the rush, failing to reach their full potential and eventually find more traditional ways to make money. Understanding the importance of each of these trading tips and how they work together can help you establish a viable trading plan and increase your odds of success in a highly competitive arena.
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