Let me state at the outset of this article that given the number of rules involved in its successful execution trading is the simplest profession on earth. There are two basic rules in trading. They are if the share is trending up over the time frame you are interested in then you go long whatever share you are following. Conversely, if the share you are following is trending down, you sell whatever share you are following. These two rules can be even further truncated to if it goes up go long, if it goes down sell it.
These two rules apply no matter what time frame you invest or trade over. If you are an aggressive intra-day trader then the time frame you are interested in may be minutes. If you are managing your superannuation portfolio then the time frame you are interested in may be months or even years. The time frame is irrelevant what matters is the strict application of the rules.
Whenever I mention these rules in a seminar most of the audience nods in a wise, sage-like fashion. Of course, the rules are easy to follow, of course, you want to own shares that are going up you don’t want to own shares that are going down.
However ask yourself this simple question, have you ever held onto a share that was going down in value in the vain hope that it would get better? Or even worse have you ever engaged in the strategy of averaging down? Have you ever sold a share pre-emptively in the belief that you should take your gain and run
If you have done either of these two then you have broken the prime rules of trading and if I were to look at your trading history then what I would see is a pattern of selling stocks that go up and buying stocks that are going down. Without wishing to sound harsh what you are doing in ignoring the two prime directives of trading is guaranteeing that your results no matter how you trade and what your methodology will always be very ordinary. You can take some comfort in that you are not alone fund managers and stockbrokers fall prey to the same sorts of idiocy this is why 99% of all fund managers underperform the index against which they compete.
However, stating the issue is part of the answer. The question is how to move away from habits that are holding your results back and guaranteeing that your trading or investing will forever remain mediocre. There are a few simple tips that can greatly enhance your profitability.
Firstly you must state what your objectives are in trading. Why have you invested and before I hear a chorus of ….to be rich stupid….I have to caution you that this is a far too simplistic answer and may be part of the issue. In one of the great paradoxes that seem to abound in markets if you aim to simply be rich then chances are you will struggle.
The reasons why this occurs are complex but they are bound up in the various behaviours that this attitude engenders. You must carefully define what you think trading will bring you about your lifestyle.
Secondly, you will need to articulate how you will go about your trading, what time frame will you trade what instruments will you trade. If you wish to trade specialist markets such as options or futures then this will require further education and is a type of trading that requires a more active involvement on the part of the trader. Do you have a dream about trading overseas markets? If you do what makes you think you can be successful in an overseas market but not domestically?
Finally and most importantly you will need to draw all these points into a trading plan. Your trading plan is a roadmap for your survival it will need to spell out your aims in trading. Any landmarks such as wanting to have achieved a particular equity size by a given date or having undertaken a certain number of courses before beginning your trading. The final part of a plan deals with the execution phase of trading and will include features such as what are you triggers for entering a trade, what will cause you to exit a trade and what is your position sizing methodology.
If you do not have a written trading plan do not trade again until you do. More importantly, if you have not understood what I meant when I referred to position sizing don’t take another position in the market until you do. This may seem harsh, but there is a secret to trading part of that secret is the planning aspect of trading. But the real secret is in understanding position sizing this is such a secret very few people involved in markets know anything about it. Yet it is a prerequisite for your survival no matter how or what you trade.
