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9 Tricks Of The Successful Trader
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.
Step 1. 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. (For more, see Invest With A Thesis.)
Step 2. 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.
Step 3. 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. (For related reading, see What is the difference between fundamental and technical analysis and Blending Technical And Fundamental Analysis.)
Step 4. 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.
Step 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.
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 $2,400, then your average win would be $2,400/6 = $400.
If your losses were $1,200, then your average loss would be $1,200/4 =
$300. 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 means that your
system will return you 40 cents per dollar over the long term. |
Step 6. 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 $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. (For further reading, see Leverage's Double-Edged Sword Need Not Cut Deep.)
Step 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.
Step 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. 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. (To learn more, see Patience Is A Trader’s Virtue.)
Step 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.
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.
http://investopedia.com/articles/forex/08/successful-trader-traits.asp
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| Category: Forex for Beginners | Added by: forex-market (2009-05-20)
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| Views: 1381
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