In today’s crowded financial market place, there is no shortage of advice to be found to help you become a successful share trader. In my experience, however, there are just a few basic and important principles which, if adhered to, will maximize your ability to succeed, especially in the type of volatile trading environment we’ve witnessed in the share market in recent times.
Here are my five pointers:
1. Plan ahead: this should be the fundamental plank in your share trading strategy, because without adequate planning, you will almost certainly run into strife. Have a written trading plan in which you set out your objectives, your entry and exit points, and your stop loss strategy. Then be sure to stick to it!
2. Invest in information: if you’re investing in the share market, then you should also be investing in the best information systems and technology you can get your hands on. You should put aside plenty of time in your trading regime to understand these systems so you can get the most out of them. It’s an old cliché but a sound one: knowledge is power.
3. Avoid emotion: fear and greed are said to drive markets, but as a trader, these emotions are your worst enemies. Don’t veer from your trading plan, even it means limiting your exposure to upside opportunities. Remember, your plan has to guide you through hundreds of trades, not just one
It’s all about giving yourself the best probability of success over time. One proven technique for reducing the emotional impact of a trade is to take a large number of small positions so you don’t have too much riding on a single win or loss.
Many traders follow the “two percent rule” whereby they tie up no more than 2% of their capital in any one trade.
4. Manage risks: set a limit on the amount you’re willing to place at risk, and don’t budge from it, no matter the circumstances.
And you should always use a stop loss strategy to exit losing positions.
5. Learn…from your mistakes as well as your successes. Track your performance to understand what works and what doesn’t, then update your trading plan. And don’t lose heart when you make a mistake: the most successful traders in the world have notched up plenty of errors along the way to a fortune!
And here are my five things to avoid making those stuff-ups:
1. Don’t get greedy! Far too many traders make the mistake of gambling too much of their capital on a single, winning trade. Regular, small profits are not only safer, they quickly build into something big.
2. Don’t try to do too much: in other words, choose a few stocks and spend time getting to know them very well – inside out in fact. Understand what drives them, and where their resistance and support is.
3. Understand leverage: it’s a mistake to ignore trading tools like options and CFDs which can be a boon for traders, particularly in a falling market. Do the numbers so you know what you have at risk.
4. Don’t forget the bigger picture: your charting brilliance can come to nothing when some major economic news blows the market away. Keep track of upcoming releases of data and economic statistics and be aware of how they might affect the market.
5. Patience is a virtue: it’s a potentially dangerous error to be impatient. Wait for the right moment to take a position, and don’t step in just because you feel you should be doing something.
And there’s one more golden rule to stick to in your trading career: enjoy yourself!