The game of trading financial markets can be very rewarding but difficult. It requires technical skills, emotional control, and above all patience. There is a tremendous amount of information online on this topic and new traders may find it overwhelming and confusing. Having said that, let’s look at a series of fundamental tips so that you are best prepared for your trading journey. We will delve into:
- Building a trading plan
- Managing emotions
- Risk management
- Staying informed
- Practicing patience
1. Building a trading plan: This is essential on the path to becoming a successful trader. A trading plan provides you with a clear roadmap for decision-making and execution. This structure provides you with discipline, allowing you to focus on what is most important, and avoid placing impulsive trades which, most of the time, leads to a bad outcome. Key elements of a trading plan include:
a) definition of your trading goal(s), what percentage return you seek per month, how much money do wish to make and over what period of time
b) your risk tolerance, how aggressive to you wish to be
c) clear entry and exit points per trade.
2. Managing emotions: A vital but often overlooked factor in successful trading. Emotions can drive impulsive decisions which are the enemy of a trader as they may result in very costly mistakes. The two most common emotional states which traders experience are fear and greed. Greed can result in trades being entered too late, chasing the market, or holding onto a winning trade for too long. While fear may result in trades being cut prematurely, or not taken at all. To mitigate these risks, adhere to your trading plan and your predefined risk tolerance and goals; they serve as the guiding lights during the heat of the market.
2. Risk management: This is the process of identifying, assessing and, where possible, neutralising any possible risks in trading. This will aid you in avoiding blow-up risk, large losses which kill your trading account, and helps you in maintaining discipline and focus when executing on your trading plan. Key techniques of risk management include:
a) Use stop-loss orders, an order to automatically exit a trade if it reaches a certain loss threshold.
b) Risk-reward ratio analysis, this allows you to assess whether a trade (potential percentage gain) is worth the risk (potential percentage loss.)
c) Position sizing, a vital tool in a trader’s repertoire, determines how much capital is used per trade. An appropriate position sizing will ensure you avoid blow-up risk.
4. Staying informed: Trading requires continuous learning as markets are constantly evolving given the flow of new information. Keeping up-to-date will aid you in making more informed decisions, and allow you to spot potential trading opportunities and risks. It may be useful to segment information flow by topic based on your trading plan and currently active trades. For financial market news, websites such as Bloomberg is a good resource. For economic developments, tradingview.com provides economic data and news. Social media platforms such as Twitter is useful for near real-time information and updates, provided you follow credible individuals and firms.
5. Practicing patience: Trading is a game of consistently incremental wins built up over time, therefore patience is a vital trait of any successful trader. It is ability to wait for the right trade to come along regardless of the market’s ups and downs. Furthermore, patience is needed to ensure you stick to you trading plan, avoiding impulsive actions or exiting trades too early for example. To cultivate patience, always adhere to the rules you lay out for yourself in the first three points above. Lastly, taking a break to clear you mind is never a bad idea as it allows for a change in perspective.
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