Most successful traders have learned that there are fundamental rules that must be followed in order to achieve success. Unlike investing, which requires a long term strategy and superior asset allocation, successful trading comes from taking advantage of short term changes in market pricing. There are certain rules that if followed, will help traders take advantage of short term market fluctuations while maintaining risk control.
Execute a trading plan
First off all traders must create and execute a comprehensive trading plan. Since each trading strategy has its own risk/ return characteristics, they are not appropriate for every portfolio. For this reason a trader should segregate risk capital into separate portfolios by risk and return expectation so that the combined return is enough to achieve one’s financial goals. By performing this type of capital segregation by investment objective, the trader keeps from putting all his or her eggs in one basket. It is important to keep diversification across accounts so that an unexpected change in the markets doesn’t wipe out one’s entire trading budget.
Maintain Trade Discipline
In addition, a trading plan and investment portfolio should outline the method and strategy to be used to fulfill the portfolio’s investment objective. Traders should stay disciplined and focus on the predetermined strategies being used. Trading tactics should only be adjusted when there is a significant change in market fundamentals or return expectations. Maintaining trading discipline by following a predetermined trading strategy is one of the simplest risk controls since it keeps traders from chasing opportunities where the return expectations are not commensurate with the risk being taken.
Follow a specific group of stocks
Another simple risk control is to trade a specific set of stocks. Technical analysis and predicting short term changes in stock prices is possible because each stock has a specific group of people that trade it. Each stock has a personality that reflects the expectations of its clientele. Because of this, entry and exit strategies can be determined by identifying how a stock has reacted to a similar event in the past. It is by knowing and understanding a stock’s personality can predictable patterns be identified and the correct trades be made. The best way to lose money trading is to overlay a previously successful trading tactic or technical indicator on an unknown stock.
Get a stock market education
The best way to reduce the learning curve and become a proficient trader is to get a good stock market education. Become a master trader involves borrowing the experience of other traders that have learned the intricacies of the trading strategies that they follow. By learning these techniques one can become proficient quickly without the cost and risk of trial and error trading the market. In addition to teaching the correct strategies, a good stock education company will also teach students how to create a workable trading plan, foster trading discipline, and focus on risk control.
Practice trade
Outside of a trading education the best way to learn new trading strategies and stocks is to paper trade. Almost every online brokerage firm has some type of virtual trading platform which allows traders to practice trade without putting any capital at risk. Traders should use these platforms to follow new stocks and to gauge potential changes to their current trading techniques. Paper trading also allows traders to discover the best stocks to trade in relation to the trading strategies they follow.
Focus on risk management
Becoming a better trader involves increasing the probability of success, which is the same way of saying reducing the risk of losses. Risk management is the key to better trading which is obtained by following a detailed trading plan, staying focused and disciplined, and learning the stocks and strategies that you trade.
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