The Secret That Makes For a Successful Trader
by, 4th-July-2008 at 07:19 PM (1091 Views)
There are hundred of articles and books that will tell you how to trade successfully.How to look out for certain charting signals which will tell you when it is the right time to buy.
Of course you do your own research. Of course you buy when the stock is trending upwards.Etc .You stick to your preset plan of when to sell at the best profit possible.You do everything that they tell you to do and more besides.
Then you can have purchased the best software program available, which has cost you thousands of dollars.
Then you also subscribe to to the numerous newsletters and listen to expert advisors who will tell you what to buy and when to buy .All for a substantial fee of course.
Even with all this going for you is there any guarantee that you will be a success? I am afraid the answer is a resounding NO!
By doing everything above you have given yourself a better chance of being a successful share trader than the amateur. But without that “Secret Ingredient”you are doomed to eventual failure, for the odds are stacked against you.
Have you figured out yet what it is? Without this knowledge you are almost doomed to failure.
What I am about to tell you will make a big difference towards your trading success.For without it you hard earned starting up capital will be lost very quickly.
Ok! you have twisted my arm.
The Secret is nothing more simpler than Risk Control.
The successful trader accepts risk as an inescapable fact of life while he is trading in the market.It is his devotion to risk management that will determine his trading success.
.I shall explain in more depth how important managing risk is.For without it your days in the trading market are numbered.
The very first thing you must look at is Your Own Attitude To Risk. It is essential to know exactly how you react to risk and what sort of trader you are. I am afraid I cannot help you here.For it is a decision that you alone and you alone can make.Now for a closer look at risk.
It is of vital importance that each and every trade has to be assessed individually for the risks vary with each separate stock.
We shall assume that you have done your basic research before you picked this particular stock to invest/risk your capital in.
The next thing you have to look at is the stock itself. Take a look at todays' chart and you will find that the stock can only go in one of three directions.i.e. that is upwards,downwards or sideways. If it is it is going steadily upwards the risk of it going downwards are already reduced in your favour.
Understanding charting activity plays an important part in risk management because it reveals possibilities and gives you more choices.
I also employ a probability factor scale, you can adjust the percentages to suit your own risk tolerance.It is basically this:-
1. If the stock is currently going upwards it has 70% chance of continuing upwards, a 20%chance of going sideways and a10% chance of going downwards.
2..If the stock is trending sideways it has 50% chance of going up or down.An even money bet in other words
3. If the stock is trending downwards then it has a 70% chance of continuing downwards. 20% chance of going sideways and a 10% chance of going upwards.
Of course there are no guarantees but it effectively reduces some, but not all of the risk factor in your favour.
You have secondly have to look at the “Time Factors” involved .For Time is the most difficult risk variable in your trading plan.
1. How long will will the trade take to complete? Is it a short trade measuring days or is it of a longer duration?
For the longer the trade is open the more chance the market has of turning against you.For you have no idea which future events may influence your stocks share price.
For it is the activity in the market itself which determines the outcome of your stock,that is whether the share price goes up or down.
2. Two constant companions in the stock market are Fear and Greed. Let these two emotions govern your trading and your risk factor has just been multiplied astronomically.
So be aware of how they can effect your trading. either by paralysing you or by keeping you in that trade little bit longer than you should have been.
Letting your emotions rule your trading is a sure fire way to financial ruin.
3. Employ a stop loss to minimise your losses and use a trailing stop loss to lock in any profit you may have already made.
4. Use the 2% rule.That is limit the risk on ant single trrade yo no more than 2%of total trading or portfolio capital i.e $100,000 capital means that we lose no more than $2,000.
The correct application of the 2% rule may mean the loss in a single individual trade may grow to to 10% or 30%. However it will not exceed the dollar amount of $2,000
5. Diversify! This means basically spreading your investments, this spreads your risk.Do not trade just in resource or mining stocks.But have some exposure to other areas of investment.
As you may have noticed some sectors in the market have already been hit harder than others.
Learn by your past experiences or better still the experience of others .Remember each trade is just one of a series of probabilities and your success or the lack of it is determined by how you use that “Secret Ingredient” Risk Management.
The higher the rewards, the higher the risk Only if you do nothing to manage risk.