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. In this article we'll look at nine
steps 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.
Step1.
Define
your goals and then choose a style of trading that is compatible with those
goals. Be sure your personality is a match for the style of trading you choose.
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. For example, if you cannot stomach
going to sleep with an open position in the market then you might consider day
trading. On the other hand, if you have funds that you think will benefit from
the appreciation of a trade over a period of some months, then a position
trader is what you want to consider becoming. But no matter what style of
trading you choose, be sure that your personality fits the style of trading you
undertake. A personality mismatch will lead to stress and certain losses.
Step2.
Choose a
broker with whom you feel comfortable but also one who offers a trading
platform that is appropriate for your style of trading.
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. In
choosing a broker, it is important to read the broker documentation. Know your
broker's policies. Also make sure that your broker's trading platform is
suitable for the analysis you want to do. For example, if you like to trade off
of Fibonacci numbers, be sure the broker's platform can draw Fibonacci lines. 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.
Step3.
Choose a
methodology and then be consistent in its application.
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. Remember that fundamentals drive the trend in the long term,
whereas chart patterns may offer trading opportunities in the short term.
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.
Step4.
Choose a
longer time frame for direction analysis and a shorter time frame to time entry
or exit.
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. Step5.
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. Here is the formula:
E= [1+ (W/L)] x P – 1
where:
W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
Example:
If you made 10 trades and six of them were winning trades and four were losing
trades, your percentage win ratio would be 6/10 or 60%. If your six trades made
Rs2, 400, then your average win would be Rs2, 400/6 = Rs400. If your losses
were Rs1, 200, then your average loss would be Rs1, 200/4 = Rs300. Apply these
results to the formula and you get; E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%.
A positive 40% expectancy
Step6
Focus on
your trades and learn to love small losses.
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 Rs10, 000 in your trading account, never let
any trade lose more than 2% of the account value, or Rs200. If your stops are
farther away than 2% of your account, trade shorter time frames or decrease the
leverage.
Step7.
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.
Step8.
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. Perhaps a pattern is making a double top and the pundits and the news is
suggesting a market reversal. This is a kind of reflexivity where the pattern
could be prompting the pundits while the pundits are reinforcing the pattern.
Or the pundits may be telling you that the market is about to explode. Perhaps
these are pundits hoping to lure you into the market so that they can sell
their positions on increased liquidity. These are the kinds of actions to look
for to help you formulate your upcoming trading week. 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.
Step9.
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.
Bottom Line
The steps above will lead you to a structured approach to trading and in return
should help you become a more refined trader. Trading is an art and the only
way to become increasingly proficient is through consistent and disciplined
practice. Remember the expression: the harder you practice the luckier you'll
get.
