As a beginning stock market trader, I frequently visited an unpleasant place called Loss Vegas. It was teeming with would be investors and traders with grand aspirations of making a killing in the stock market. Differing life experiences, bank account balances, and strategies separated them but they were all bound by the possibilities of great riches there for the taking. Some were even aware of the chances of success being less than ideal and were not deterred. I could be counted among those who would not be denied.
The numbers don't lie! 9 out 10 stock traders will fail, miserably! That is the same ratio for starting a business. At least in the case of running a business, there's a 5-year failure window. I would say that a very small minority of beginning traders makes it past their first year. The reason for such an unbalanced success/fail ratio is simple. 9 out of 10 people entering the market would be better categorized as gamblers and not traders. Yes, I too, was one of those gamblers masquerading as a stock market trader.
In order to become a successful trader, you must have a winning strategy. In contrast, most beginning traders systematically make the same mistake over and over again. A flawed trading strategy will eventually wipe you out of the markets. This article will help you formulate a winning strategy.
Many business principles can be applied to stock trading. Having a trading plan is a necessary prerequisite for stock trading success. This plan is your road map as you travel along the path to stock trading mastery. Skipping this step has caused many to crash and burn leaving financial scars for years to come.
The trading plan must outline why you are trading the markets. Here's a heads up. It's not to make money, initially! The number one objective of a stock trader is to trade well. Profits are a by-product of trading well. Counting profits while practicing your trade is counter-productive to your success. You certainly wouldn't want a firefighter thinking about how much his paycheck will be while your house is on fire, would you? Focus on your trade. The money will come.
Once you have committed yourself to learning to trade well, the next step is proper execution of the plan. This will include:
1. Market Research-stock selection, risk/reward ratios
2. Entry Points
3. Money Management- where to place protective stops
4. Targeting Exit Points
5. Review Trade Plan Execution- Did you trade your plan?
I use this exact process when trading stocks and options. Deviating from your trading plan can hinder your progression as a trader in two areas. First, the effectiveness of a trading strategy cannot be accurately measured when a trader is inconsistent in the execution of a trading strategy. And secondly, altering your strategy in the midst of a trade is hazardous to your wealth. A prime example would be moving your protective stop in the opposite direction of your trade. This allows for a wider, much riskier stop loss cushion. Moving protective stops in the opposite direction of the trade is a sure sign of a rookie trader.
Implementing and executing a proper trade plan will certainly tip the scales in your favor of becoming a successful trader. Fewer, less frequent visits to Loss Vegas are a very good thing. Happy trading.
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