Anyone who wants to become a profitable stock trader needs only spend a few minutes online to find such phrases as "plan your trade; trade your plan" and "keep your losses to a minimum." For new traders, these tidbits can seem more like a distraction than actionable advice. If you're new to trading, you probably just want to know how to hurry up and make money.
Always Use a Trading Plan
A trading plan is a written set of rules that specifies a trader's entry, exit, and money management criteria for every purchase. Lance Ippolito says today's technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.
Treat Trading Like a Business
To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job. If it's approached as a hobby, there is no real commitment to learning. If it's a job, it can be frustrating because there is no regular paycheck. Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and you must research and strategize to maximize your business's potential.
Use Technology to Your Advantage
Trading is a competitive business. It's safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology. Charting platforms give traders an infinite variety of ways to view and analyze markets. Back-testing an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.
Protect Your Trading Capital
Saving enough money to fund a trading account takes a great deal of time and effort. It can be even more difficult if you have to do it twice. It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.
Risk Only What You Can Afford to Lose
Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it's not, the trader should keep saving until it is. Money in a trading account should not be allocated for the kid's college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.
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