Spoiler Alert: There is no holy grail in trading. You must put in the time and effort if you want to become an elite trader. Educate yourself first and then focus on improving your process.
Here are four essentials to becoming a profitable trader.
Trade your Best Setups
As the old saying goes: “There are several ways to skin a cat.” Some traders are good at analyzing breaking news and reacting quickly to them.
Others focus on: chart patterns, earnings, breakouts, mean-reversion, trading niche sectors like ETFs, biotechs, and low float stocks. What makes them money might not work for you. Maybe you have capital restrictions or don’t have the stomach for certain trading styles.
Learn from other successful traders and ask yourself if it matches your personality. If you don’t feel comfortable buying into weakness then you should avoid that. On the other hand, if you prefer to go with the trend then spend time getting better trading those types of trades.
Don’t take it personally if you can’t trade the same way as one of your friends or mentors. Highly successful traders know what their strengths are and focus exclusively on getting bigger and better at trading them.
You only need a couple of trading methods with an edge to be a successful trader. Once you find success at one, stick to it and see how far it can take you.
To know what those are you’ll have to journal and record your results, the same way a business analyzes its books.
Find your edge and stick to it. Once you’ve exhausted a successful technique then move on to learning something else to add to your trader’s toolkit.
Pay Attention To Detail
You don’t need to be in front of your computer all day watching the markets. However, when you decide to trade make sure that you’re distraction free. In addition, pay attention to all the details.
Questions to ask yourself include:
Is there news in this stock?
Is there an upcoming catalyst like an earnings release, company meeting with analysts, FDA announcement or anything that could potentially move the stock.
Is the stock liquid enough to trade?
Is there something happening to a similar company that might spill over to the name you’re trying to trade.
Do you have levels on which you want to enter and exit (if you’re right or wrong).
Does the stock have high short interest?
Does the stock have a low float?
How is the stock trading relative to the overall market?
Will you be using limit orders, market orders, put in stop losses, how do you plan to execute?
Can you explain why the stock is moving up or down and what your edge is?
There is a thought process successful traders have. They ask themselves a number of questions and weigh in the pros and cons before entering a trade.
Like it or not… you’re going to have losing trades. However, you should limit mistakes that are unnecessary. For example, hopping on a phone call without putting a stop is a sloppy mistake. Getting into a stock that has earnings without reading the results is sloppy.
To be an elite trader you must avoid rookie mistakes.
Base Trades On Evidence Not Hope
Have you ever taken a long position in a stock and then second guessed yourself immediately after. That is a sign that you didn’t really have confidence in your idea. On the other hand, imagine taking a long position after seeing a specific chart pattern that you know has had a high probability of success in the past.
Having done your homework and seeing similar scenarios play out will give you greater confidence to stick with the trade.
Traders are always comparing previous experiences to present ones. For example, they might say something like: “We saw this same move in XYZ last week and I think we could see it again here.” Now, it doesn’t always play out that way, but sticking to evidence-based trading will help to stay confident.
Be A Good Loser
Don’t take losing trades personally. Some traders beat themselves up way too much after taking a loss as if it’s a representation of who they are as a human being.
Stocks go up… stocks go down… deal with it.
Instead of making it personal, go back to your process and analyze what you did right and wrong. Ask yourself if you followed a rules-based approach or if you acted on impulse.
It’s okay to take a small loss if you feel like the risk-reward has changed. Stick to your trading plan and let the probabilities work in your favor. You don’t want to be that person who pats themselves on the back who constantly takes small winners and then lets one or two bad trades destroy their trading account. Winning percentage is one of the most overrated statistics in trading. The best example of this is the book “The Black Swan” written by Nicholas Nassim Taleb. He made a fortune despite having a low winning percentage.
Successful traders stick to what they know works. They are okay with being wrong and they don’t beat themselves up. They do their homework and constantly review their process. Instead of hoping to get lucky they plan and prepare. Follow these four essentials and you too will become a better trader.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share.
Our Raging Bull Experts have been featured on: