Nearly all great traders will tell you that developing good habits played a big role in their success. Let’s face it, if you just follow and copy other traders, you’re limiting yourself and not learning a whole lot. Rather, you should try to figure out what works for you and what doesn’t. When you’re first starting out to trade, you need to focus on the process so you could potentially make trading your career. Now, if you have a mentor, you’re well on your way to becoming a successful trader. You need to ask them questions, and ultimately you will develop your own trading style. That said, you need to understand the reasons behind why you need to trade your own strategy.
Why You Need to Trade Your Own Strategy
Being Self Sufficient
One of the reasons you need to trade your own strategy is the fact that your mentor or other traders in the community may not be around all the time. Traders have families and take vacations, so if you’re the only one on the desk while they’re away, you could miss out on money. When you don’t have your own trading style, you end up trading with “crutches” and you’re heavily reliant on your mentor.
When you trade your own strategy, you become self sufficient and you could constantly improve your own strategy. Moreover, everyone’s risk limit is different. I might have a higher risk tolerance than you, so it does not really make sense to mimic exactly what your trading guru does. You can use your mentor’s trading ideas and principles, but you should not fully copy exactly what they do. Just like in school, copying someone else does not help you learn.
Defining Your Strategy and Edge
One of the first things you need to do is define your strategy and edge. In order to trade your own strategy, you need to know what it is. That said, you need to know what stocks you’re looking for, whether you focused on being long or short only, your position sizing, your risk tolerance. What I’ve learned over the years is you need to figure out what works for you and what your edge is. If you find that you like trading your mentor’s style, go ahead and do that. However, you need to keep in mind that you need to make some tweaks.
For example, over the years, I’ve developed a trading strategy that fit my wants and needs, and it also played to my strengths. Once you’ve figured out a profitable strategy, you might want to expand your strategies and look to learn from others.
Example of Trading Strategy and Style
Catalyst Swing names (1 – 4 week holds) I am watching…
Catalyst Dates: Will complete DSMB analysis in July
Buy Zone: $.29 to $.31
Profit Zone: $.37 or higher
Stop Zone: $.27 or below
Catalyst Dates: FDA Approval date of November 2, likely to have an Advisory Committee meeting announce beforehand
Buy Zone: $1.70 to $1.90
Profit Zone: $2.20 or higher
Stop Zone: $1.50 or below
Tetraphase Pharma (TTPH)
Catalyst Dates: FDA Approval date of August 28th
Buy Zone: $3.90 to $4.10
Profit Zone: $4.75 or higher
Stop Zone: $3.70 or below
Arena Pharmaceuticals (ARNA)
Catalyst Dates: Phase 2 data due in the third quarter
Buy Zone: $46.50 to $47.50
Profit Zone: $50.00 or higher
Stop Zone: $45.00 or below
My strengths are in biotech stocks and buying ahead of clinical trial results. That said, I’ve developed a way to trade these that works for me, as well as many other traders in the community.
How to Trade Your Own Strategy
First things first, figure out which asset class you would focus on. I’m focused on stocks, particularly biotech stocks, as well as options on stocks. Next, you need to figure out the amount you would risk per trade, the risk-reward ratio, where you would buy and sell. When you fix these parameters, it would be a lot easier for you to tweak and scale your strategy once you’ve got the hang of things.
Now, if you find a strategy that has worked in the past, say more than 5 years, chances are it could continue to work. Conversely, if you find a strategy doesn’t work for you, you should just abandon it. In trading, continuing to trade the same strategy that doesn’t work will be detrimental to your account.
In short, stick to what you know and what works for you.
The Bottom Line
When you’re starting to learn how to trade, you need to learn to trade your own strategy. It’s not enough to just follow someone into trades. You need to ask questions and learn from your mentors, and ultimately you would define your own trading strategy and style. If you don’t trade your own strategy, you run the risk of ruining your trading account, and you don’t want to do that.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. He’s also using his knowledge and looking to multiply his capital through options trades.