This post is for people who are already trading the market or are interested in trading. Remember, trading is much different than investing, so if you're interested in investment strategies, these tips aren't for you. If you are already trading, let me know in the comments below whether you are able to relate to some of these points. But if you’re new to trading, I urge you to memorize these points, as they are the results of almost 4 years of trading experience and numerous discussions with other traders.
1. Don’t Follow Blindly – Do Your Own Research
If you really want to be successful, you cannot just blindly follow others. That principal applies to any activity we do in life, be it sports, education or our 9-5 job.
If we just follow someone else, sooner or later we will get burned. This applies even more to trading because the person you are following might have a motive behind his actions which you may not be aware of. Another critical issue is the delay, if you are following a person into a trade; there is no guarantee that you will get the same price as that person did. So blindly following is inevitably going to get you burned. Swear after me if you are trader – Thou shalt not follow anyone blindly.
Having said that, it’s okay to listen to people and take their advice, but at the end of the day while trading, you must be acting on your own.
2. Check Your Emotions at the Door
If you have been trading, you will gradually notice how important it is to keep your emotions in check. Trading with emotions is the biggest recipe for disaster. Let’s look at a case:
Imagine that you are holding 200 shares of AAPL and it gaps down 20 points. So you’re down 4,000 – is that loss too big for you to lock in? For most people it is and let me tell you that most people won’t book such a loss but wait for the stock to recover! Eventually that loss becomes wider and one has to take a much bigger hit in few weeks after waiting for the stock to recover.
Now on the other hand, sometimes people get captivated by greed. So let’s say you are holding 200 shares of AAPL and the stock goes up 50 points. Do you sell at that point? Most people will find 10k profits enough and they will sell out. But seasoned traders wait until the stock stops moving but they will continue to ladder out of their position. As it starts to stall out, they will exit from the stock. So if you can keep your emotions in check, trading can become a little easier. So rule number 1 in trading: Cut your losers and let winners run.
3. Be Consistent – Riches Don't Come Overnight
Consistency is the name of the game in trading. If you want to be successful in the long term, you have to stay in the game for it. Most traders blow their trading accounts at least 2-3 times in their career and end up quitting trading for good.
The first requirement of trading is that you have to stay in the game, and the best way is to become disciplined and consistent. Figure out the position size and trading style that works for you and come up with monthly and yearly goals, and stick to them. There is absolutely no need to try to become rich overnight. So, if you target $10,000 a month, you can make $120,000 as yearly income, which is quite substantial. But if you try to make $50,000 a month and sit on hands for the next 3-4 months, the whole game changes. Such risky trades usually carry a lot of risk and can potentially damage your trading account badly.
4. Develop Your Own Trading Rules
Like any other career, you must be constantly learning from your experience. The same thing applies to trading. Anything different that happens during the day, make a note of it. Over time, this trading journal will be your go-to place in times of crisis. Similarly, every trade needs to be logged or documented with a detailed explanation mentioning what worked and what problems you faced. You should make it a habit to go back to the journal and review it every other week. Overtime one can find trends from this journal that can lead to highly successful trading.
5. Analyze Your Performance
Measure, measure and measure!
Figure out what is working for you. Are you more of a short trader or long. Do stocks work out better for you vs. options? What kind of holding period works best for you? All these questions and many others can only be answered by analyzing your trades regularly and learn from the findings. Following are some interesting stats to monitor:
- Position Size vs % PnL
- Long / Short vs. % PnL
- Stocks / Options vs. % PnL
- Month by Month PnL % (to figure if seasonality plays a role in your bottom line)
- Day of Week % PnL
- Win Ratio
- Average Gain Size vs. Average Loss Size
- Holding Period for Gains vs. Loss
In order to calculate these stats, you can import your trades into any analytics software and generate a report. The site I mentioned for logging my trades provides an easy way to analyze your trades as well. There are many more stats that traders should track, but I think the aforementioned list is a good starting point. For more advance stats, please feel free to get in touch with me.
6. Actively Network with Successful Traders
No matter how good trader you are, the market is going to do its own thing. Sooner or later, you will feel the need to network with solid traders to exchange ideas and validate your trade ideas. The market requires traders to constantly adapt to market conditions and trading patterns. Being part of a successful trader network helps you adapt faster, as you can see other traders trying out various techniques so you don’t have to make all those mistakes. You can learn from others and shorten your learning curve.
7. Assess Your Risk Appetite and Plan Accordingly
Many new traders don't know their risk appetite and end up trading in position sizes that are much larger than they’re able to handle. At any point you should be able to take 8-10% hit on your position. So if you aren’t comfortable with the potential loss, you should reduce your position size.
Risk is also increased by holding into various events such as earnings, as stocks tend to move wild after that event. So if you are holding the stock and it misses the earning, it might go down 10-20% easily. Why take such risks? Track these events and get out before the event. You can always get back into a stock. As a rule, I would rather wish I was in a stock than out of it.
You can also look at what kind of stocks you are trading. High beta stocks carry higher risks, similarly options trading is more risky than stocks trading. As a trader, the best advice that you can use is to assess your risk appetite. If you can deal with risk successfully, your chances to succeeding in trading go up tremendously.
I sincerely hope that the above can be of some help to the traders out there. I have been trading for past four years and these rules have come in handy to align my trading better. In my opinion, these rules can be used equally by newbies and advanced traders alike, though newbie traders need to pay more attention, as they tend to get carried away by the market trends and overextend themselves. I am happy to discuss trading related topics, so please feel free to reach out to me.
About the Author:
Punit Gupta is an entrepreneur and full time stock trader. Punit specializes in building startups by bootstrapping. Currently Punit is developing a brokerage comparison platform and a stock traders networking platform. Punit attended the Georgia Institute of Technology, Atlanta and worked with an Atlanta based startup for 7 years before quitting his job to start his own venture.