As a trader, you’ll come across all kinds of gurus offering conflicting advice and trying to sell you on complicated strategies. As a veteran of the market, I’m here to tell you that there’s a core set of simple guidelines you should follow. If you can learn a strategy that works and apply these rules to your trading, you will be doing better than the vast majority of traders out there.
Know the pattern: Master a couple simple, consistent trading patterns. Novice traders often make the mistake of trying to learn too many strategies. The grab an idea from this book, a strategy from that Twitter personality, throw in a bunch of indicators, and out comes a jumbled mess. Don’t try to be the jack of all trades. Learn a couple of strategies inside and out: how to identify them; what happens when they work; what happens when they fail. Once you’ve mastered those, then you can expand your repertoire
Let the pattern dictate the risk/reward: A key part of learning a trading pattern is knowing where to set your stops and scale-out points. Recognizing a pattern and then buying the shares is only half the battle. If you don’t also know where to set stops, you will be leaving money on the table and exposing yourself to undue risk. In fact, one of the most valuable aspects of useful trading patterns is that they provide these stop loss and profit-taking levels.
Risk reward needs to be in your favor: The best traders are only right about 65% of the time. That means that out of a hundred trades, 45 will cost you money. And that’s if you are the cream of the stock trading crop. So if you want to make – and keep – money trading, you need to only trade when the risk to reward is in your favor. If a trade offers a $1/share profit and a $.25/share risk, those are good odds. Anything lower than two-to-one, though, and you are playing with fire.
Volume is vital: It surprises me how many traders – included self-professed experts – don’t give much weight to volume. Volume is key. It shows that there is real participation in a stock’s movement. You want to see high relative volume on stocks you are trading. This is particularly true for breakouts over resistance – you want to see broad participation and excitement behind the move. Ditch the fancy overlays and complicated indicators and pay attention to volume.
Use hard stops and trim and trail exits: You should know where your stop level is for a trade before you get in it. And that stop should be hard, meaning you don’t move it down once you are in the position. Your mind will provide many excuses for why you should lower your stop loss, but you must ignore those. Conversely, on a profitable trade, you should be selling partial positions as the stock rises (or falls, if it’s short). That way you are guaranteeing at least some profit on the trade while leaving it room to run further.
Cut the noise: Trading in 2016 is like standing in the middle of a raging river of information. News, Twitter, alerts, gurus, etc. Everything is competing for your attention. Tune it out. Start each day with a plan, and then stick to it. If you are regularly following and reacting to everything going on around you, you’ll find yourself overwhelmed and three steps behind.
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