Milestones You Must Pass to Become a Trader

Most people jump into the stock market expecting instant, grandiose results that are not realistic. Sorry to burst your bubble, but trading success is a marathon, not a sprint! For a lot of people that is hard to hear. They don’t want to train, they don’t want to get out of their comfort zone, and they don’t want to change their lifestyle in order to achieve success. They want money to be handed to them on a silver platter.

We are here to tell you the truth: There are no shortcuts. Successful trading is hard work, and any other line of thinking is a one-way ticket to failure.

Trading is a journey, and you need to treat it as such. Back to the marathon analogy for a moment. When you are training for an endurance race, you don’t immediately go out the first day and run 26.2 miles, or even 10 miles. The first thing you do is build a realistic step-by-step program to build up your endurance based on your starting point. If you try to run too far, or too fast, you could injure yourself or damage your psyche.

Trading is the exact same way.

Goal-setting is extremely important in life, and especially in trading. Yes, you should have a long-term goal of where you want to eventually get to, but you also need to have short-term goals that are specific, realistic, and measurable.

In this article, I lay out what I believe to be a four milestones, or checkpoints, that every trader should pass through before trying to take the next step. In my opinion, if you try to bypass one of these milestones, you will end up costing yourself a considerable amount of money in the long-term.

1. Trade 100 shares until you have become consistently profitable for a three-month period.

It might get frustrating to trade small size, but during that initial phase you are training your hands, eyes, and, most importantly, your mind. Learn how to punch the keys fast and efficiently, develop a routine for watching stocks, and build good habits. During this period, you should craft a specific style of trading and be able to define your “edge.” If it takes you longer than three months to get past this phase, that is OK and normal. Again, in our opinion, if you try to bypass this stage and trade bigger size before you are ready, it will cost you money.

2. Increase share size and manage multiple positions at once.

In the first stage, you want to focus on micro-managing one position at a time, learning the ins and outs of how stocks move. Once you have mastered that skill, it’s time to take a step up. Don’t increase your share size by 10 times immediately, take incremental steps higher. Trade 200 then 300, and when you have achieved consistently at those levels, then makes the jump to maybe 500, 600. Don’t ever trade more size than you are comfortable with.

In the same vein, don’t go from managing one position at a time to 10. Add more positions incrementally as you get more comfortable and you get more clarity on the market. Eventually, you hope to get to a level of someone like big traders who often holds 20-30 positions at any given time, but keep in mind that he has been on his trading journey for more than 15 years and has developed his skills over a period of time.

3. Add more indicators and another level of sophistication to your analysis.

In the first stage of the trader path, you should be able to define your edge, but that doesn’t mean you have a complete tool belt! The core of your strategy should not change; you should simply add a few indicators to sharpen that edge. A few price action strategy that you may consider.

Adding a couple of price action strategy to your trading arsenal can be a powerful step, but it is very important not to use too many indicators.  If you try to wait for trades where seven to eight strategy line up, then you may never place a single trade! Find a few go-to strategies in which you have supreme confidence, and incorporate them into your trading.

Psychology & Risk Management For Traders

1.     I keep Blue Channels turned off while trading.

2.     I do not care about others opinions I care only about price and chart action.

3.     I do not try to predict, instead I trade in accordance with the chart.

4.     I am not trying to prove I am right I am trying to make money.

5.     I am not trading for ego gratification I am trading for money.

6.     I am not trying to be the genius who calls a top I am the trend follower who follows a trend all the way up until it ends.

7.     I admit freely to my losing trades along with my winning trades.

8.     I do not get emotionally attached to each price movement throughout the day.

9.     I have faith in my rules, methodology and system.

10.  I understand it that it is the market conditions and not me that creates profits.

RISK MANAGEMENT

1.     I never add to a losing position.

2.     I carefully control position sizing to limit risk based on volatility.

3.     I attempt to never lose more than 1% of my capital on any one trade.

4.     I trade smaller when volatility is high.

5.     I have stale stops and sale positions that do not trend in four days after entry.

6.     I quickly sell losing trades when my stop is hit.

7.     I sell stocks when they close in the bottom of the day’s range.

8.     I never expose more than 6% of my capital to possible loss at any one time.

9.     Risk is priority #1, profits are #2.

Ingredients to a Profitable Trading

As people get into this great business of trading, many are exposed to a heck of a lot misinformation.  So, that being said, let me lay out what I truly believe are the 5 keys to a profitable trading methodology:

·         Reliability.  This basically means at what percentage of the time do you actually make money?  A lot of people (most in fact) emphasize this.  Many traders want to be right on every trade because they were taught that 70% or less is failing.  NOT in trading though, you can be right only 50% of the time and still make a lot of money…as long as you have the other four keys in place

·        Risk to Reward Ratio in other words, this is the relative size of your profits compared with you losses.  Ultimately you want to have a 2:1 (or better) risk to reward relationship when first putting on a trade.  However, this may be pretty difficult to find.  It would be more realistic to find (or create) a trading methodology that has a 1:1 risk to reward relationship; then once you factor in your ‘trade management’ to the trades it comes out to a 2:1+ risk to reward type of trade.  You’ve heard this many times before I’m sure, and it applies here too:  cut your losses short, and let you profits run.  It’s obviously one of the keys to successful trading, but is very hard for many traders to do.

·        The number of your trading opportunities.  This means how many trades does your trading methodology actually generate?  If your system only generates, let’s say only 25 trades a year (for swing or position trading), that’s fine, but you’re limited to how much you can make due to the low amount of trade set ups.  However, if you have a system (trading methodology) that trades five or ten times that amount (25)you will make a lot more money, assuming that the other 4 keys are in place that are outlined here.

·        The size of your trading capital.  Let’s face it, if your trading account is real small (i.e. 50000 to 100000) it’s harder to make really good returns.  But, when your account is larger (i.e. 500,000+) it becomes easier to make good returns.

·        Position sizing strategies.  Position sizing strategies tell you how much to risk throughout the course of a trade.  It’s an essential ingredient to the whole money management philosophy.  In fact it’s so very important that without implementing a position sizing strategy the chances of you succeeding are doubtful.  Position sizing is responsible for about 90% of your overall performance variability; that’s how important it is.

So, there you have it, the five keys to a profitable trading methodology once again are:

1.  Reliability,

2.  Risk to Reward Ratio,

3.  Number of Trading Opportunities,

4.  Size of Trading Capital, and

5.  Position Sizing Strategies

And regardless of the market or time frame you decide to trade, all five of these keys are important to a highly profitable trading methodology.  At the minimum, you need number one (Reliability), two (Risk to Reward Ratio) and number five (Position Sizing Strategies) to make a lot of money in the markets.  So, I urge you to honestly evaluate your current trading system/methodology to see how it stacks up against these five keys in a successful trading approach.