Ten Things For New Traders To STUDY

Many new traders just get lost in the mountain of trading information out there so here are ten key things to study how to do. The answers to these questions are different for everyone because everyone has to trade their own plan and their own way that fits their goals, risk tolerance, and personality not to mention their ability to manage stress.

1. Learn to cut losses as soon as you realize your were wrong.

2. Be patient with winning trades and only exit when you have a reason to.

3. Place your stop loss on a trade outside the normal noise in your time frame to the place that really tells.

4. Learn how to identify the trend in your time frame and trade it.

5. Structure your trades through stop losses and position sizes so that if you are wrong you only lose 1% of your trading capital.

6. Exit when you plan to not because of fear.

7. Enter a trade according to your signal don’t mess it due to your fear.

8. Follow your trading plan not your emotions.

9. Don’t let your ego cause you to trade too big or your fear to trade too small for your risk management parameters.

10. Don’t ask for others trades, opinions, or predictions instead find out who you want to be as a trader. The exploration to being a good trader starts with in.

Trading Methods That Lose Money

Trading is difficult because no method, system, or style works in all markets, all the time.

Profitability is primarily a result of losing small when you are wrong, and maximizing profits when you are right. Knowing and trading your edge is the best path to profits. Here is who makes (or loses) money in different types of markets:

1. Trend followers make money when a strong market trend persists for months. They lose money when markets give false signals and reverse and stop them out.
2. Swing traders lose money when support and resistance do not hold.
3. Day traders lose money in markets that fail to move in one direction intraday, and instead move fast and erratically.
4. Option premium sellers get hurt in sharply trending markets when they sell spreads, or naked options.
5. Option buyers get hurt in markets that move against their options, don’t trend enough, or that don’t move enough before their expiration.
6. Momentum traders lose money in markets that are range-bound or tend to reverse after break outs.
7. Investors lose money in bear markets.
8. Buy and holders lose money in bear markets.
9. Perma-Bulls lose money in bear markets.
10. Perma-Bears lose money in bull markets.
11. Fundamentalists lose money in any market that doesn’t conform to their analysis of what should happen.
12. Traders that trade too big of position size blow up eventually in any market environment.

Two Hidden Virtues of Successful Traders

 One of the most interesting aspects of working as a trading coach is the ability to see, first hand, what contributes to the success of traders.  So often the factors that lead to success are not those emphasized in mainstream articles and books.  Here are two unappreciated virtues I see among successful portfolio managers and traders:

1)  The ability to tolerate uncertainty - Suppose you take any particular configuration of price in a market; say, trading x% above or below a Y period moving average.  Then look at what that market does on average over the next Y period.  The odds are great that for any value of x and Y, the market's directional tendency will be swamped by the variability of price within that next Y period.  What that means is that, on average, the signal to noise ratio for a directional trader is low.  Whatever directional tendency is present is generally not statistically significant and not readily tradeable.  Given such a situation, the modal opinion of any trader should be "I don't know".  Uncertainty is itself a view and, in fact, should be one's base case.  When a trader cannot tolerate uncertainty and needs to manufacture conviction, the result inevitably is overtrading the objective opportunity set.  It is impossible to properly manage risk if you are intolerant of uncertainty.

2)  The productivity of time spent away from trading - I consistently find that successful traders spend more time identifying good trading opportunities than actually putting on and managing trades.  Csikszentmihalyi conducted a fascinating study with artists in which they were shown 27 objects and asked to arrange a small group of them into a composition and generate a sketch.  They had one hour for the task.  The artists fell into two categories.  One group quickly identified the objects for the composition and spent the better part of the hour refining their sketches.  The second group spent most the hour figuring out what to draw.  They selected objects, started sketches, changed the objects, sketched some more, rearranged objects, etc.  By the time they found the composition they liked, they spent only a few minutes on the final sketch.  The drawings of the second group were rated as significantly more creative by a group of art critics than those of the first group and, after a five year period, the second group demonstrated significantly greater success as artists.  The less successful artists spent most their time sketching.  The successful artists spent most their time finding compositions worthy of sketching.  It's a great analogy for trading.

Good things happen when these two strengths come together.  The ability to accept uncertainty frees the mind to maximize time away from trading and creatively generate sound trade ideas.  For the successful trader, uncertainty provides the opportunity to get away from screens and look at markets through new lenses.  Overtrading exists when the need to trade exceeds the need to understand.

Strong Foundations Weather Storms

Trading Plan (Blueprints)- Before you start your trading journey, you have to have a strong plan to assure that you don’t suffer emotionally or financially. Your trading plan will be your guide, and when things get rough, you’ll always know that you will make it to the other side.

Education (Building Blocks) – Without the necessary building blocks, a new trader will never be able to rise above mediocrity. It’s important to spend the necessary time learning the craft both before you begin trading, and as you continue to grow in your career.

Risk Management (Insurance)- Risk management is your insurance against ruin. No one spends time in a dangerous environment without having some form of insurance. Your risk should be no more than 1% in any one trade, and no more than three trades open at any one time.

Psychology (Peace of mind)- In order to trade in a dangerous climate, you have to stay calm at all times. By not trading out of your comfort zone, or risking too much, you will be able to stick to your plan and avoid mental and emotional stress.

Remember that there have been many storms in the markets. If you build a strong foundation and stay focused, you will soon realize that this storm shall pass, and eventually you will see the rainbow.