What trips up the vast majority of traders, so they never quite make the transition from new trader to good trader?
- Not being able to deal with the stress of trading. This is caused primarily from a lack of faith in themselves, and or their method.
- They lack the ability to pull the trigger when it is time to enter a trade, or cut a loss.
- Some people just can’t overcome the fear of losing money, both in the entry and the exit.
- Many traders just don’t have the discipline or work ethic to create a trading plan through proper homework.
- Most traders have no trouble overanalyzing the markets. Many traders read enough books to know how to trade, or follow so many people online that they get confused and don’t know what to do.
What is the key to over coming the barriers to success in trading? A GOOD TRADING PLAN. I’m not talking about a few rules, I mean a complete (written) trading plan. A plan that you believe in 100%, based on your own studies and backtesting. Your own personal plan that YOU created, and not someone’s opinions.
What needs to be in there?
1. Entering a trade. Quantified approved entries.
2. Exiting a trade. Predetermined Exit point BEFORE you enter a trade.
3. Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.
4. Money Management. How much capital will you risk on any one trade? This is the key to position sizing.
5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?
6. What to Trade. What qualifies stocks to be on your watch list?
7. Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?
8. Backtesting. You need backtesting either with a computer, by reviewing charts, or others research to show that your system is a winner.
9. Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.
10. Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.
This is a very basic outline. I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will be a successful trader.