Always use stops. Â Risk control is the true measure of a good consistent trader. If you lose all your capital on the lemons, you canâ€™t play when the great trades set up. Consider cash as having an option value.
Donâ€™t over trade. Â This is the number one reason why individual traders and investors lose money. Look at your trades of the past year and apply the 90/10 rule. Dump the least profitable 90% and watch your performance skyrocket. Then aim for that 10%. Over trading is a great early retirement plan for your broker, not you.
Donâ€™t forget to sell. Â Date, donâ€™t marry your positions. Remember, pigs get slaughtered. Always leave the last 10%-15% of a move for the next guy.
Donâ€™t chase the market. Â If you do, it will turn back and bite you. Wait for it to come to you. If your miss the train, there will be another one along in hours, days, weeks, or months. Patience is truly a virtue in this business.
When I put on a position, I calculate how much I am willing to lose to keep it. Â I then put a stop just below there. If I get triggered, I just walk away. Only enter a trade when the risk/ reward is in your favor. You can start at 2:1. That means only risk a dollar to potentially make two.
Always be willing to go Long (Buy) and Short (Sell).Â You have to be flexible and dynamic in your tradingâ€¦one minute I could be long the market and the very next minute I may be short the market. Â You need to be able to flip flop and be quick and nimble in your trading.
You donâ€™t have to be a genius to play this came. If that was required, Wall Street would have run out of players a long time ago. If you employ risk control and stops, then you can be wrong 40% of the time, and still make a living. Thatâ€™s little better than a coin toss. If youâ€™re wrong only 30% of the time, you can make millions.Â If youâ€™re wrong only 20% of the time, you are heading a trading desk at Goldman Sachs. If youâ€™re wrong a mere 10% of the time, youâ€™re running a $20 billion hedge fund that the public only hears about when you pay/invest $100 million.Â And if someone tells you theyâ€™re never wrong, as is often claimed on the Internet, run a mile, because itâ€™s simply impossible!
Trading is hard work. Â Trading attracts a lot of wide eyed, naÃ¯ve, but lazy people because it appears so easy from the outside. You buy a stock (futures contract, forex, option, etf, etc.), watch it go up, and make money. How hard is that? The reality is that successful trading and or investing requires twice as much work as a normal job. The more research you put into a trade, the more comfortable you will become, and the more profitable it will be.
Donâ€™t confuse a bull market with brilliance. Â When the market goes straight up (i.e. 1995 to 2000) anybody and their grandmother can make money.
John Maynard Keynes, the great economist and early hedge fund trader of the thirties,Â once said: â€œMarkets can remain illogical longer than you can remain solvent.â€ Hang around long enough, and you will see this proven time and time again.
Donâ€™t believe the media. Â Look for the hard data, the numbers, and youâ€™ll see that often the talking heads, the paid industry apologists, and politicians donâ€™t know what theyâ€™re talking about.
Sometimes the conventional wisdom is right.
INVEST like a fundamentalist, execute like a technical analyst.Â (Swing) TRADE using technical analysisâ€¦then by understanding basic fundamentals will make you even better.
Technical analysisâ€¦knowing how to read charts like a daily newspaper is key to successful trading. Â That said, learn what an â€œoutside vertical barâ€ is, and who the hell is Leonardo Fibonacci.
The simpler a market approach, the better it works (the â€˜KISSâ€™ method). Â Everyone talks about â€œbuy low and sell highâ€, but few actually do it. All black boxes eventually blow up, if they were ever there in the first place.
Markets are made up of people. Â Understand and anticipate how traders think, and you will make a lot of money.Â The market is made up of peoples fear and greedâ€¦itâ€™s all psychologicalâ€¦learn how to read people and youâ€™ll certainly be ahead of everybody else.
Understand what information is in the market and what isnâ€™t and you will make more money.
Do the hard trade, the one that everyone tells you that you are â€œCrazyâ€ to do. Â If you add a position and then throw up or feel sick afterwards, then you know youâ€™ve done the right thing.
If you are trying to get out of a hole, the first thing to do is quit digging and throw away the shovel â€“ exit your trade asap. A blank/neutral/flat position can be invigorating.
Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training.