As a beginning stock market trader, I frequently visited an unpleasant place called Loss Vegas. It was teeming with would be investors and traders with grand aspirations of making a killing in the stock market. Differing life experiences, bank account balances, and strategies separated them but they were all bound by the possibilities of great riches there for the taking. Some were even aware of the chances of success being less than ideal and were not deterred. I could be counted among those who would not be denied.
The numbers don't lie! 9 out 10 stock traders will fail, miserably! That is the same ratio for starting a business. At least in the case of running a business, there's a 5-year failure window. I would say that a very small minority of beginning traders makes it past their first year. The reason for such an unbalanced success/fail ratio is simple. 9 out of 10 people entering the market would be better categorized as gamblers and not traders. Yes, I too, was one of those gamblers masquerading as a stock market trader.
Successful traders employ proven, winning trade strategies. Most beginning traders systematically make the same mistake over and over again. Venturing into the market without a sound trading plan is financial suicide. Here is a guide to structuring your own winning trading strategy.
Many principles of running a successful business can be applied to stock trading. Having a trading plan is essential to the success of your new venture. Consider this trading plan to be your road map that guides you to stock trading mastery. Skipping this step will ensure your permanent residency in Loss Vegas.
The trading plan must outline the why or purpose for trading the markets. If your purpose is to simply make money, you are in for a rude awakening. The number one objective of a stock trader is to trade well NOT make money. Focusing on trading well will result in you making money. Making profitable trades is a by-product of trading well. Calculating profits while practicing your trade is counter-productive to your efforts. You certainly wouldn't want a lawyer tabulating his fees while researching your case, would you? The same focus needs to be applied while you trade. There will be plenty of time for counting your windfall once you have closed out your position.
After committing yourself to learning to trade well, the next step in the process is executing the plan. This includes but is not limited to:
1. Conducting Market Research-stock selection, risk/reward ratios
2. Pinpointing Entry Points
3. Money Management- where to place protective stops
4. Establishing Exit Points
5. Trade Review
I use this exact process when trading stocks and options. Deviating from your trading plan can hinder your progression as a trader in two areas. First, the effectiveness of a trading strategy cannot be accurately measured when a trader is inconsistent in the execution of a trading strategy. And secondly, altering your strategy in the midst of a trade is hazardous to your wealth. A prime example would be moving your protective stop in the opposite direction of your trade. This allows for a wider, much riskier stop loss cushion. Moving protective stops in the opposite direction of the trade is a sure sign of a rookie trader.
Following this simple formula will not eliminate visits to Loss Vegas but will ensure shorter, less frequent stays. Happy trading and here's to your success!
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