The famous saying of “90% of traders lose 90% of their account balances” is true. In fact, those stats are given by most licensed brokers. You might ask yourself why do so many traders lose, or if trading can be profitable at all, but in reality, this conception can be seen in our daily lives.
As an example, becoming fit should be easy! You go to the gym and exercise. But most people fail to do so, as there are much more things to do, like checking your body composition, setting a workout plan, monitor your progress, eating healthy…In the trading world, the same thing happens, and when you look closely at every bad trader, you’ll notice a basic rookie mistake has been done.
You’ve probably read thousands of articles about how to become a successful trader, but they’re mostly cliché gimmicks and motivational posts…Well not in this article.
So without further ado, here are 5 essential tips EVERY trader should follow:
1- Define your Trading Style
There are 3 most common trading styles:
- Day Trading: Opening and closing positions within a single day
- Swing Trading: Opening positions for a few days or weeks
- Long Term Trading: Closely related to value investing or the “Warren Buffet Approach”, where traders open positions for months or years, as part of a portfolio.
Before opening any trade, you MUST know for how long you’re planning to keep the trade open. Usually, when volatility is very high in the market, traders reshuffle their portfolios and focus more on Day Trading or Swing Trading, whereas if the volatility in the market is weak, you switch to Long Term Trading or Investing.
2- Picking an Asset Class
After defining your trading style, it is important to know what you will trade. Is it a certain technology stock like Facebook? Or a commodity like Gold? Or maybe a cryptocurrency like Bitcoin?
There are more than 600,000 publicly traded companies worldwide, and more than 5,000 cryptocurrencies to trade. In order to be able to narrow down your pick, it is a good idea to use a Top-Down approach, mainly for Swing and Long Term trading, which suggests starting a pick from a macro perspective, such as a specific sector, then picking an industry, then choosing a certain stock for a company that has certain news or earning calls coming up.
Another example for Day Trading would be picking companies with a highly volatile stock price for the day. Then going through basic fundamentals such as any news or announcements from the company to know the general consensus of the market towards that company.
There are many different ways to pick your asset class, and each trader usually develops his own technique. But what’s very important is to stay updated with the news. The CryptoTicker trading group for example, always sends out regular news, price analyses, and forecasts on cryptocurrencies. So if you’re trading cryptocurrencies, it is highly advisable to follow our regular updates.
3- Do your own Analysis
Yes, your OWN analysis. Many traders surf the web for other people’s analyses and end up opening losing trades. You can definitely get inspired by other traders in order to better assess a certain trade, but you MUST go back to your charting software and do your own work. This is essential, as different traders have different exit strategies, different goals, different trading styles…Not every gym-goer has the same workout, why would you copy other traders?
Technical analysis is very important and helps you define your entry and exit trades. It is not the only analysis you should base your whole strategy on though, as important news sometimes can make our whole technical analysis void.
For example, let’s say you charted your way up to a good trading strategy for a certain stock. The technical analysis shows you a strong uptrend, but you miss important news, which was a bad earning call. Nothing will matter anymore, the price will dip and all your work will go to waste.
4- Set up a Risk Management Strategy
Another crucial step to consider is when to get out of your trade (you won’t keep your positions open forever, as even Long Term Traders reshuffle their portfolios occasionally).
For proper risk management, you must keep in mind 3 things:
- Entry Level: it’s the price where you plan to enter the trade, always based on strong support or resistance levels.
- Exit Level:
- Stop Loss: it’s the price where you limit your losses and avoid wiping out your account
- Take Profit: it’s the price where you take your profit and get out of the market before it reverses
- Risk/Reward ratio: in laymen terms, it is a calculation of how much you are willing to risk in a trade (stop loss level), versus how much you plan to profit from a trade (take profit level). Anything less than 1:2 is not advisable (Risking 1$ to make 2$).
ALWAYS know the above levels before entering any trade. It is also advisable to have automated stop-loss levels, as we humans tend to get emotional, hoping for the price to go back up while it sinks further.
5- Document Everything
So you defined your trading style, picked an asset to trade, did your proper research, and set up your risk management strategy. What’s left now?
The most important step, of course, is to document everything. Not all trades will be winners, and that’s part of the business. But what you can do is assess where things went wrong and improve your trading strategy in your next trades. This is the only way to get better.
Documenting your trades is known as having a trading journal. This might be an excel file where you register your asset class name, time of entry, time of exit, price of entry, price of exit, leverage, net profit/loss and maybe inserting comments. After a certain period, you should be able to assess your overall trading performance, know which trades are ending up horribly wrong, and where you’re doing a good job.
Professional traders usually use the Kelly Criterion formula to assess what percentage of their money they should allocate to each investment. But you can always find other metrics to measure your success.
Follow each of the 5 above tips step by step, rinse, and repeat. The only way to get better is by trying over and over, there are no shortcuts.
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