Selecting Trades Properly
This is where so many traders go wrong. From the outset they dont know
what type of trader that they want to be. The guru is a day trader or an
option-only trader, so you should be, too. If the guru is trading a $50,000
account or recommends a $10,000 account, you should immediately
follow suit.
Wrong!
You must trade to your strengths, interests, seed capital, time constraints,
and abilities. Look at the experience of the program creator and
realistically look at yourself.
If you cant stomach day trading, dont do it.
If position trading is too stressful for you, dont do it.
Whatever the case,
avoid putting on trades that simply dont match who you are as a person.
If you are looking to stretch your boundaries into new trading arenas,
first use a demo account and apply, to the best of your ability, the same
conditions that you would experience if you were actually trading that way.
As we know, ideal conditions never set the rulethey prove exception.
A little self-knowledge can go a long way to diminishing or eliminating
improper trades from your lifestyle.
Entering Trades Properly
This leads us into how to enter a trade. In order to make a trade successful,
you have to know how you are going to get out and what you have at risk.
By fixating on the profits, you set yourself up for failure. The reality of
trading is that profits take care of themselves. If you have picked a good
trade and the market is going in the right direction, there is little you can
actively do to make that trade any better.
However, the question in the back of your mind should always revolve
around: What if I am wrong? By entering a trade with that question on
your mind, you can figure out if the trade is worth taking at all. Successful
trade entry is based solely on what you will do to exit. Often, this has to take into account what risk management tools you
will use in order to make the trade successful.
Monitoring the Trade
If you are a position trader, why are you watching the market hour by hour?
If you are a swing trader, why are you looking at end-of-day results? These
are genuine questions I have had to ask clients over the years. The key
reasons fall back on one of two answers.
They dont want to put a stop order in the market because they are
afraid their stops will be run, so they keep mental stops and sit at their
screen to get out fast; or they just like to watch the market. They are
actually letting every tick on the screen influence how they act or, more
importantly, how they will react to the market.
Whatever the reason of how and why a trader monitors the market, the
core reason is fear. They dont trust the judgment that they have used to get
into the trade, and they really dont know how to protect themselves from
losses besides either ignoring the market completely or watching tick by
tick to anticipate what will happen next in the market.
Successful monitoring has to also have a back-up plan. Much like
chess, you need to be three, five, maybe even seven moves ahead of your
opponent. There is only one way to succeed in a trade: The market has to
move in your direction. But there are at least two ways to lose: the market
moves against you or the market does nothing.
If you prepare for these contingencies, your monitoring becomes a
function of your preparation, not a crutch to rescue a trade that bad.
Exiting the Trade
Who determines how you get out of a trade, you or the market?
If its you, then maybe your actions are reactionary or you simply dont
have enough capital to be trading the markets that you are in. This is exactly
why you have to know yourself when you execute a trade.
How you got in the market should be the exact reason why you get out
of the market, if the markets fundamentally shift supply and demand in the
opposite direction of your initial position.
When the market shifts, you should have targets in place to capture
profits you have made or to protect your principal. These dont necessarily
need to be monetary targets; they could be overbought/oversold indicators,
Bollinger bands, and so on. The key point is that you have a
reason for why you do what you do, coupled with a back-up plan that
helps you reenter the market without being whipsawed or chasing the
markets.
The exact way you get out of a trade will have a direct impact on how
you get back into the market. It will determine if you can even get back in
or if its too late, or if you can double up on your contracts, or if its time to
find a new market altogether.
The exit, profits, and losses, should all be carefully prepared far in advance
of ever putting your first dollar on the trade. This is the only way to
prepare for an exit of a tradeleave a little room for unpleasant surprises.