Below are 10 essential trading elements that every trader should consider.
Skill assessment
Before a trader starts trading, he needs to assess whether he is ready for the market. A simple way to test his system against the market is by virtual trading/paper trading it till he feels comfortable with it. He should only start trading real money once he is totally at ease with the system and can make money consistantly.
Mental assessment
Another important aspect of trading is mental. Many traders make fortunes virtual trading, but when it comes to real money, 2 factors come into play - fear and greed. Fear of losing money and greed of earning more money will ultimately and inevitably be a traders downfall. He should learn to keep his emotions in check, and also be prepared for the ups and downs of the market.
Set risk levels
Everybody has different risk levels. A retiree in his 60s will not risk much of his account size per trade; whereas young aggressive traders in their 20s will not hesitate to plough a large portion of their account size in each trade. One must come to term with his psychology - whether he is a conservative or aggressive towards the market. Higher risks comes with higher rewards - and the vice versa may also apply. To know oneself is a step towards becoming a better trader.
Set goals
There is a saying - "Reach for the moon. Even if u fail, you'll still land amongst the stars" While it sounds corny and cheesy, I believe one should constantly aim for greater heights. He should aim for the next level, instead of giving in to mediocrity. While aiming high is encouraged, the goals shouldnt be the I-intend-to-earn-US$1m-using-my-$1k -account-in-a-year type. Set high goals, but also set realistic goals.
Do your homework
By this, it means doing your pre-market scans, watching for impending economic/earning data (which might cause unwanted volatility) etc. Do not go into the market unprepared, for it robs complacent players mercilessly.
Set exit rules
I believe exit rules are equally, if not as important, as entry rules. Knowing when to exit a trade is paramount to building equity. Set a profit target, and stick to it.
Set entry rules
Entry rules should be precise and leave no room for guesswork. It should be a well thought out and written down in black and white, and followed to a T. (of course, it should be tested profitable too) Discipline and consistancy will be rewarded to those whom abides by it.
Keep excellent records
By writing down each trade, you have an indicator of how well you're doing. Keep a P/L sheet, plot a monthly equity graph, whatever works for you - but KEEP RECORDS!
Perform a post-mortem
It has and always will be a good practise to perform an after-action-review of each trade. Hindsight is 20/20, and usually the trade will become clearer to you once you have been detached emotionally from it. Write down the reasons you entered the trade, reasons you exited the trade, stuff like what you did well, what you should have done, and what you can do better next time. This 'diary of trades' is vital over the long run, as you can read about past trades and improve upon them.
Please post your thoughts and comments if any regarding this. I appreciate your feedback.
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1 comment:
Comprehensive, yet concise. A well-rounded holistic view of the different factors and variables that are necessarily involved in the treatment of the market forces. I personally adhere to the credo that a clinical step-by-step approach to trading is by far the safest and wisest approach, as without a transparently clear overview of the processes involved, it is easy to fall into various traps and pitfalls that might cripple an unwary trader.
However, one other thing which I have a personal fondness for, but which I understand is not relevant to or even comfortable for some other traders is the collaboration with trusted friends.
Basically, engineered niche juxtaposition allows multiple individuals nice leverage. I assume network gain.
Simply put, a coherent circle of friends that can cover different areas or niches allows traders to focus on specialties and concentrate more wholly on aspects of the market they are comfortable with. Obviously, it is imperative that traders are familiar with all aspects of trading, and all varieties of shares, but still, having a trading partner to watch different trends and market movements can be helpful.
Just a thought, from someone who has seen it executed very successfully in the past. Of course, certain people value their privacy and might resent sharing their own decision-making criterion and process with other traders. The choice is of course, personal.
Other than that, I did enjoy reading this overview, seeing as how it provides a good introduction to new traders, without excluding more experienced ones who oft times need to be reminded of the basics and fundamentals necessitated by the demanding game of trading.
-Thomas Goh (not Saw!)
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