10 Steps to Profitable Trading

[piranha526]

It's been a while (long time) since I posted (on any forum) but I have been reading from time to time. Anyway, I felt this post I wrote for my site was good enough to be pasted here:

The secret to winning big in the market is not to be right all the time but to lose the least amount of money possible when you are wrong. As long as you win larger than you lose, you will be a profitable trader at the end of each year. Pride, ego and stubbornness prevents a trader from reaching the levels that very few can master.



To become a profitable trader, you must:

• 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
• 2. Understand Position Sizing: All traders must learn to know “how much†to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
• 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
• 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
• 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
• 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
• 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
• 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
• 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
• 10. Control Emotions: Enough said – You must control your emotions or the game is over! Understand You!

 

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[MJ DeMarco]

Welome back Chris! Great post.

 

[cmartin371]

Yes I agree....great post. Number 7 I could not agree more on. Along with all the others of course!:hl:

 

[veli]

Nice post. I love trading, but Ive lost track over how many times Ive blown up my account.
I know the techinals (can always learn more of course). My big problems however are; having a hard time taking loss. Somehow I just seem to refuse to stop out if my entry is wrong, and thus it usually ends up in me losing big, instead of taking a small loss. Also, when Im up a decent amount, even more than I set out for, I take bigger risk, and get into that gambling modus (although I dont gamble at all otherwise).
So having rules you follow is of course vital in this business, and although I know safetys or stop losses are basically "insurance money" and part of the trading costs, I have a hard time disciplining myself to simply have the discipline to work on a auto-pilot.

Great points Pirana, I know them all, Im just having a hard time implementing them 100%

 

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[MJ DeMarco]

#11) Ignore Jim Cramer, and when possible, do opposite of his advice.

 

[HenkHolland]

# 3 and 4 are the most difficult ones for most non-professional traders. Luckily nowadays most online brokers offer us the possibility to work with fixed and trailing stops which act on our behalf when the time to quit has come.

 

[andviv]

I know the techinals (can always learn more of course). My big problems however are; having a hard time taking loss. Somehow I just seem to refuse to stop out if my entry is wrong, and thus it usually ends up in me losing big, instead of taking a small loss. Also, when Im up a decent amount, even more than I set out for, I take bigger risk, and get into that gambling modus (although I dont gamble at all otherwise).
So having rules you follow is of course vital in this business, and although I know safetys or stop losses are basically "insurance money" and part of the trading costs, I have a hard time disciplining myself to simply have the discipline to work on a auto-pilot.

Great points Pirana, I know them all, Im just having a hard time implementing them 100%

Piranha526, great to have you back, rep++ for a great post.

veli, rep++. You just raised a great point. Investing (not only as a trader but in any endeavor) requires that you really know yourself and understand how you react to things so you can improve in what is needed. Investing is 100% personal. It affect each of us differently.

Pretty much everybody (prob. 95%+ of the population) know that smoking is not good for your health yet many still do. Same about overeating, or not exercising. Knowing intellectually does not really mean understanding. We all knew the RE market would go down after going up for so long but many couldn't resist the temptation and invested at the wrong time. So yes, we many times know, but we don't really get it.

 

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[NerdSmasher]

#11) Ignore Jim Cramer, and when possible, do opposite of his advice.

I don't know, if you've ever watched the stocks he recommends, they always have a nice increase (10% more or less) the next day, but tend to lose most if not all of it after about an hour or two into the trading day. So, it's possible to build a trading plan around his recommendations... buy puts when you think it's at it's high for the day, and sell them an hour later or so.
I was going to actually look deeply into this plan at one point, but forgot about it, lol. It's something to look into, perhaps?

 

[australianinvestor]

Hi Chris,

I'm a fundamental investor, probably primarily because I'm a business person, but also due to the fact that the technical analysis I learned during my MBA failed to convince me that it's an appropriate way to invest money. I have concerns with assumptions built into the whole field of technical analysis, but that's a long and tiring debate for another day!

(All you technical guys and girls, hear me out!)

I used to think in terms of fundamental versus technical investing, but your post mentions fundamental with technical, which is something that sounds very intriguing.

Could you expand on that a little? I'd love to hear how you combine the two.


Daniel

 

[HenkHolland]

IMHO technical analysis tends to work as a kind of self-fulfilling prophecy because so many investors use it and place their buy and sell moments at the levels predicted/dictated by the technical analysis.

BTW, as an addition to the very useful list that Chris posted, I would recommend to look at information here Money Management | TurtleTrader

 

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[NerdSmasher]

I used to think in terms of fundamental versus technical investing, but your post mentions fundamental with technical, which is something that sounds very intriguing.

Could you expand on that a little? I'd love to hear how you combine the two.

Granted, I'm not Chris, but I think his point in that is to use the thought processes of both. For example, find a company that has good, growing profits, nice P/E, whatever fundamental things you like in it. Then, look at it from the technical side, and try to get a good entry point; or at least try not to buy when it's at a peak that, by different technical thoughts, will go down quickly soon.

Basically, just read both sides of the story. If the fundamentals say it's going to go up, and the technicals say it's going to go down, you may not want to buy it right now. But, if they both say up, it's a great buy. And, likewise, if they both say down, it's a great short. But, you need to know how to read both sides of the story.

 

[cmartin371]

I don't know, if you've ever watched the stocks he recommends, they always have a nice increase (10% more or less) the next day, but tend to lose most if not all of it after about an hour or two into the trading day. So, it's possible to build a trading plan around his recommendations... buy puts when you think it's at it's high for the day, and sell them an hour later or so.
I was going to actually look deeply into this plan at one point, but forgot about it, lol. It's something to look into, perhaps?

It's called pump and dump. These guys have been doing it for years. They pump up a stock, everyone jumps on board, then they dump there shares for profit......

 

[ramy98]

If anone is interested in learning more about these principles , it may be a good idea to read Trade your way to financial freedom by Von K Tharp. Great Book...

 

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