Stock trading is becoming ever more popular, with the internet, supercomputing power, and ease of access to information as the driving factors. It’s relatively easy for most people to get involved in the stock market nowadays compared to, say, only a decade or two ago.
The assets available have been growing in line with the growth in trading interest. Information, one of the key factors to successful trading, is now at the touch of a keyboard to almost anyone.
Charting and technical analysis used to be considered as something exotic and mysterious. They are now easy to learn about, and even easier to handle with the latest computer software and hardware that let you instantly compare stocks.
Yet, so many traders fail, even when they have been studying, taking courses, and attending webinars. Too many still fail to put together a profitable trading strategy. Yet some do and manage to prosper from it.
I’m going to share with you a few insights that you may or may not have considered before. Most importantly, I’ll be considering them from a different approach.
1. The Art of Timing
Traders often talk of concepts like timing the market, getting the timing right, or having “a good idea but bad timing”. The simple truth is if you correctly determine the market direction for a stock, your trade should be successful. Price swings are bound to happen, you need to determine when it’s a correction in price and when you simply got it wrong.
It’s not so much a matter of when to buy but if and which stock. A stock that is experiencing a strong momentum should increase in price over the time you hold the trade. The price could dip, but the recovery should be quick. If you pick a winner, you’ll get your reward.
A Long Only Strategy
Let’s take a simple long-only strategy, you search the market for what might be the next hot stock. You identify a few candidates and decide that the trade will be split into equal amounts across your selection of stocks.
You may be tempted to wait for a market dip, but you also understand that the dip may not happen and you will miss out. So, your technical analysis shows their prices should go up and you buy.
If your trade is successful the stock’s prices will go up, even if they fluctuate. Overall you’ll see that they have increased in price. A retracement in price may simply be what you had been waiting for, or it may be a signal that the market has changed sentiment.
Before you can conclude as to whether the bull trend has failed, you need to consider a couple of things. You’ll need to determine what the volatility of each stock is, and you’ll need to search the news for breaking headlines.
You need to be less concerned about timing the market and more concerned about picking the right stock.
2. Understanding Risk Management
Most traders have heard of the concept of stop loss, fewer apply it, and even less understand it. Stop loss is a risk management feature, it’s there for you to control your losses. To achieve this control you need to come to a few conclusions.
For each trade you should be thinking: how much am I willing to lose on this one? To determine that, you need to determine first what your maximum drawdown will be. Next, you need to decide how much you are willing to lose in each trading session if things go wrong, and how many trades you will make a day.
A Numerical Example
Let’s say your maximum drawdown is $10,000 and considering that amount of trading capital you feel that $1,000 a day is going to be your maximum daily risk. You also consider you are going to put on a maximum of 5 trades a day. To determine your maximum risk per trade you would divide $1,000 by 5, giving you $250 per trade in risk.
This risk limit is your stop loss level per trade. For the stop loss to function correctly you need to determine the daily volatility of the stock. When I say function correctly, I mean that if you put on too large a trade you could get stopped out prematurely.
You also need to determine your profit limit. If your stop loss is $250 it wouldn’t make sense to put on trades where you are targeting a profit of less. Preferably, you are looking to achieve a considerably higher amount in your profit limits.
Another aspect is the automation of stop losses & profit limits. Often traders initially have a number in mind but don’t hit the close button in the hope the market recovers or continues to increase profits. Most online platforms allow you to input an automated stop loss, this way you can exit your trades timely without further intervention.
3. Fear & Greed: What to Do
Fear and greed are natural emotions. Most traders realize they may fall into those emotional traps, even if only sometimes. The issue is not only recognizing these emotions as a trader’s enemy, but also that you deal with them. I’ve seen various types of advice on how to deal with them but, in my understanding, there is only one way.
You need to take away human intervention. To achieve this goal your greatest tools are setting up entry and exit points in your trade. The next step is to automate those points with stop losses and profit limits.
Fear will make you hold on to a losing position for longer than you should or need to. Before you enter a trade you already established your exit points. If the stock price hits one of those prices you know that is the level where you need to exit. Allowing software to take care of it helps you to limit your losses.
Greed works in the same way as fear when trades go in your favor. When you set up the trade you established where you thought you could take your profit. Leaving it to an automated system will guarantee you take your profits timely. Avoiding the extremely stressful vision of a winning trade turning into a losing one.
Automating entry and exit points will lead to a simpler trading experience. Where your main work is done before the trade is entered, and where you will keep your unwanted emotions at bay.