The best traders follow consistent strategies. Many use the same signals repeatedly to show them when to enter and exit a trade. In other words, they place orders on a trading system that they have developed through trial-and-error.
In my experience, this is true for all traders. Many old school traders are not even aware that they are trading systematically, but they are. This leads me to the first of three simple things traders should do to improve their trading.
1. Develop A Simple System – And Work It
Trading is complicated, so keep it simple. You want your efforts to be highly focused like a sniper rifle, not a shotgun.
You want to develop a strategy that gives a good entry signal that
All you need to be profitable is one simple system that works on two or three tradable stocks. Many highly successful traders are minimalists – they only have one or two strategies. Some trade only four or five stocks. But they know their strategy and how it works on specific stocks so well that it gives them an enormous edge.
There’s one trader who made millions of dollars using one strategy on only three stocks. He knew exactly how the strategy worked on those three stocks and he only traded those stocks. He knew the subtle signs of price movement so intimately that he often had a very good idea what would happen next.
You may think stocks are random. But people are behind every buy and sell order, and people are creatures of habit. And when no good trades are available he goes fishing.
To start, find a technical signal and study it like crazy on just one stock. Look back at the charts and see how it performs. Volume breakouts and gap trading are a great place to start. Backtest these patterns as much as you can and see if there’s an edge.
2. Take Small Risks To Earn Big Rewards
Whether you’re a short-term trader or a long-term investor, buying a stock has the risk of loss. Sometimes the trade just does not go the way you think it will.
Keeping this in mind, good traders “risk a little to make a lot.” That means when you’re wrong, you lose a small amount that won’t wipe out your account. You expect to lose sometimes, so you move on to the next trade.
But when you’re right, you make at least three times the amount you risked, if not more. That means if you make profitable trades 50% of the time, you will be a consistently profitable trader.
To improve your trading you must look at the chart and determine two locations: where you think the stock will go (your profit target), and where the stock shows you that your prediction was wrong (your stop loss). To do this, you must be familiar with the statistics of your trading system.
There’s no reason to place a trade for 2-times reward vs. risk when there are so many trades that can yield better than 3-times reward compared to the amount of risk.
When you structure the trade correctly, trades can yield 5-times, and sometimes better than a 10-times profit. These trades are in the market every day! You just need to know how to spot them, then wait for the right time to enter. This type of trading requires patience, but the result is worth the wait.
3. Avoid Large Losses
Small losses are inevitable in trading. Large losses are completely unnecessary and easily avoided. In fact, there are only two ways a trader can have a large loss: Either by holding a loser much too long or trading too large (too many shares).
With regard to holding a loser too long, there is a saying among traders: If you can’t learn to take a small loss, then you will eventually take a large loss.
This happens when a losing trade hits the stop loss, but you don’t exit the position. Instead, you rationalize. You want to give the trade “just a little bit longer” to work. This is a recipe for disaster. The situation rarely improves much.
Take action. Take your lumps, exit the trade, and look for the next trade. The sooner you act, the better. Doing this will help you take the steps to ensure your survival as a trader. That is what matters, not any one trade.
Regarding trading too many shares, this is how many traders have blown out their accounts in just one trade. No one gets it right all the time – no one. So, traders must always take reasonable risks. When the losing trades come, we need to be able to weather the storm.
There is much more involved with profitable trading, but if you want to improve your trading three steps will go a long way to making any new trader profitable.