Trading really can be as simple as he makes it out to be. Too many people, usually those trying to sell advice or trading systems, try to make it much more complicated than it needs to be.
Some key tips for success (for a full list read this article):
- Keep It Simple, Stupid (KISS) – So many traders get bogged down in a bunch of intricate indicators. Note that all you see on our charts are price, volume and a moving average of price. While the search for that magical formula is seductive, I find that less is more with respect to using indicators. All indicators are just derivatives of price and/or volume anyway.
- Trade with the trend – This is the one that every trader knows, yet sometimes it’s hard to abide by. I know I’ve had my struggles with it. I’ll often see some tiny stock double of triple in a day (or less) on some ridiculous news/rumor. My first thought is usually ‘this is crazy, I should short this crap!’. But that kind of counter-trend trading can be very hazardous to your bank account.
There’s a quote in Dr. Alexander Elder’s ‘Trading for a Living’ that’s very appropriate:
If eight or ten people place their hands on your head and push you down, your knees will buckle no matter how strong you are. The crowd may be stupid, but they are stronger than you. Crowds have the power to create trends. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short because “prices are too high” — never argue with the crowd. You do not have to run with the crowd — but you should never run against it.
- Trade only active, liquid stocks – Stocks that are extremely active (experiencing a surge in volume) usually have some news that’s driving them. You want stocks with a good amount of volume so that you can get in and out easily, quickly, and with minimal slippage (the difference between the order that you gave your broker and the actual price that you got for your order).
- Define any risk – This one is key. You have to know where to exit (at a loss and at a profit) before you enter.
- Manage risk by adjusting a stop loss order. – This is an area that I’m always trying to improve upon. There’s an old adage that says ‘never let a profit turn into a loss.’ That’s a lot easier said than done because you have to let the stock fluctuate. But at some point, once you have a decent profit, you should move adjust your stop loss so that you’ll at least break even on the trade. This is definitely an art as opposed to a science. I like to call this process taking a free position. It’s a great feeling to be in a trade that you know you can’t lose money on. I like to get to that point as soon as reasonably possible.
- Always enters a protective stop loss order – This seems like a duplicate of the previous point, but there’s a critical distinction here. The order is a physical order, entered into the market and will execute automatically. It’s so easy to fool yourself into believing that you can get by with using ‘mental stops’ (keeping the stop prices in your head and entering the orders manually). But we all know what that leads to — the dreaded ‘stop creep’. That’s when you keep adjusting your stop as you lose more and more money in desperate hope that things will turn around. You’re risk/reward ratios won’t take kindly to that kind of thing.
- Trade always with good reward-to-risk profiles – There’s no sense in risking $500 to make $100.
- Have a well-defined plan and stick to it – Discipline and money management are the two most important aspects of trading. The greatest of trading systems will fail if you can’t stick to the system.