For all of its numbers, charts and ratios, trading is more
art than science. And just as in artistic endeavors, there is talent involved,
but talent will only take you so far. The best traders hone their skills
through practice and discipline. They perform self analysis to see what drives
their trades and learn how to keep fear and greed out of the equation. We'll
look at nine tricks a novice trader can use to perfect his or her craft; for
the experts out there, you might just find some tips that will help you make smarter,
more profitable trades, too.
1. Define Your Goals
Before you set out on any journey, it is imperative that you
have some idea of where your destination is and how you will get there.
Consequently, it is imperative that you have clear goals in mind as to what you
would like to achieve; you then have to be sure that your trading method is
capable of achieving these goals. Each type of trading style requires a
different approach and each style has a different risk profile, which requires
a different attitude and approach to trade successfully. A personality mismatch
will lead to stress and certain losses.
2. Choose The Right Broker
It is important to choose a broker who offers a
trading platform that will allow you to do the analysis you require. Choosing a
reputable broker is of paramount importance and spending time researching the
differences between brokers will be very helpful. You must know each broker's
policies and how he or she goes about making a market. For example, trading in
the over-the-counter market or spot market is different
from trading the exchange-driven markets. A good broker with a poor platform,
or a good platform with a poor broker, can be a problem. Make sure you get the
best of both.
3. Choose A Methodology And Be Consistent
Before you enter any market as a trader, you need to have
some idea of how you will make decisions to execute your trades. You must know
what information you will need in order to make the appropriate decision about
whether to enter or exit a trade. Some people choose to look at the underlying fundamentals of
the company or economy, and then use a chart to determine the best time to
execute the trade. Others use technical analysis; as a result they will
only use charts to time a trade. Whichever methodology you choose, remember to
be consistent. And be sure your methodology is adaptive. Your system should
keep up with the changing dynamics of a market.
4. Keep Your Timing In Sync
Many traders get confused because of conflicting information
that occurs when looking at charts in different time frames. What shows up as a
buying opportunity on a weekly chart could, in fact, show up as a sell signal
on an intraday chart. Therefore, if you are taking your basic trading direction
from a weekly chart and using a daily chart to time entry,
be sure to synchronize the two. In other words, if the weekly chart is giving
you a buy signal, wait until the daily chart also confirms a buy signal. Keep
your timing in sync.
5. Calculate Your Expectancy
Expectancy is the formula you use to determine how reliable
your system is. You should go back in time and measure all your trades that
were winners, versus all your trades that were losers. Then determine how
profitable your winning trades were versus how much your losing trades lost.
Take a look at your last 10 trades. If you haven't made actual trades yet, go
back on your chart to where your system would have indicated that you should
enter and exit a trade. Determine if you would have made a profit or a loss.
Write these results down. Total all your winning trades and divide the answer
by the number of winning trades you made.
6. Focus On Your Trades
Once you have funded your account, the most important thing
to remember is that your money is at risk. Therefore, your money should not be
needed for living or to pay bills etc. Consider your trading money as if it
were vacation money. Once the vacation is over your money is spent. Have the
same attitude toward trading. This will psychologically prepare you to accept
small losses, which is key to managing your risk. By focusing on your trades
and accepting small losses rather than constantly counting your equity, you
will be much more successful. Secondly, only leverage your trades to
a maximum risk of 2% of your total funds. In other words, if you have $10,000
in your trading account, never let any trade lose more than 2% of the account
value, or $200. If your stops are farther away than 2% of your
account, trade shorter time frames or decrease the leverage.
7. Build Positive Feedback Loops
A positive feedback loop is created as a result of a
well-executed trade in accordance with your plan. When you plan a trade and
then execute it well, you form a positive feedback pattern. Success breeds
success, which in turn breeds confidence - especially if the trade is
profitable. Even if you take a small loss but do so in accordance with a
planned trade, then you will be building a positive feedback loop.
8. Perform Weekend Analysis
It is always good to prepare in advance. On the weekend,
when the markets are closed, study weekly charts to look for patterns or news
that could affect your trade. In the cool light of objectivity, you will make
your best plans. Wait for your setups and learn to be patient. If the market
does not reach your point of entry, learn to sit on your hands. You might have
to wait for the opportunity longer than you anticipated. If you miss a trade,
remember that there will always be another. If you have patience and discipline
you can become a good trader.
9. Keep A Printed Record
Keeping a printed record is one of the best learning tools a
trader can have. Print out a chart and list all the reasons for the trade,
including the fundamentals that sway your decisions. Mark the chart with your
entry and your exit points. Make any relevant comments on the chart. File this
record so you can refer to it over and over again. Note the emotional reasons
for taking action. Did you panic? Were you too greedy? Were you full of
anxiety? Note all these feelings on your record. It is only when you can
objectify your trades that you will develop the mental control and discipline
to execute according to your system instead of your habits.
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