On paper, trading is easy. It’s when our emotions and ego are on the line where things tends to get messy. Most investors who take on trading will likely fail because they’re searching for a holy grail instead of improving their mental game. That why reading or re-reading trading tips from time to time can serve as a helpful reminder.
Think of a surfer. Their goal is to catch one wave on the entire ocean for just a moment of time. They’re not fighting the tides or the currents, looking to take on the world. They just want capture one little sliver of the ocean’s coattails. That’s what successful traders do with the market, too.
So let’s look at a few trading tips to help clean up that bottom line. The first? Actually having a strategy.
Trading Tips: Stick to a Trading Strategy
We can’t do anything without a strategy. Before dealing with any other factor, we need to have a trading strategy we plan on using. If you’re completely new to trading, paper trading for a while is a reasonable way to help figure out the style you prefer and the timeframe you like.
Even if you are an experienced trader, working with a new strategy in a paper trading account first can be helpful. Not just for entries and exits, but to help keep our emotions out of the strategy.
Some people will like swing trading over multiple days or weeks. Others will prefer scalping or day trading. You may enjoy trading breakouts or breakdowns, while some investors prefer the long side or the short side. Options, futures, equities… the list goes on and on.
My best advice? Find a strategy that fits your personality the best. Learn how to perfect it, then consider adding other strategies to your arsenal. Taking a Jack-of-All-Trades approach is a perfect way to become overwhelmed and eventually fail. Find what works for you, then perfect it.
Personally, I have found that red-to-green trading works well for me. The stop-loss and entry rules are well-defined, and there’s very little way for me to screw it up.
Risk, Risk, Risk
What came first, the chicken or the egg? It doesn’t really matter now, because you need both to survive. Without an edge in the market (a strategy that actually works), traders will fail in the market. Likewise, even those with a successful strategy will fail if they don’t manage their risk.
Anyone who has read the Market Wizards series by Jack Schwager will understand the importance of finding an edge and establishing a risk-management system. (For those that haven’t read the series, I highly recommend it and find his Little Book of Market Wizards to be the perfect intro).
When it comes to surviving in the most competitive environment on earth, we need to protect our backside. There’s plenty of helpful people in the trading community, but at the end of the day, we’re all trying to eat from the same pie. As soon as I established where I would I cut my losses before entering the trade — and actually stuck to the plan! — my results improved dramatically.
Not necessarily because I was winning more, but because a big loser wouldn’t wipe out a bunch of my profitable trades. When we get stopped out, we preserve a bulk of our capital and live to fight another day.
It’s different for everyone, but for me, rarely do I get stopped out and see the stock reverse higher in the direction I was hoping for. Nine times out of ten, that stop-loss prevents me from losing even more money than I was at that point. I became grateful for the stop-loss because it was actually saving me money, not locking in a painful losses.
Too tight of stops can be detrimental too. You have to find the point in the trade that says “I’m wrong,” but not having a stop so tight that you get punched out on the slightest move. That’s different for every strategy.
Start a Trade Log
This was such an important development for me. Perhaps not as important as implementing hard risk management rules or finding a strategy that worked just for me. But it has played a big role in finding specific nuances in my results.
For instance, in my quick trades I have a better winning percentage and bigger wins on the short side than the long side. That’s even as I prefer buying vs. selling short. I also notice that my best trades tend to be quick and work right away vs. taking their time and still working in my favor.
The hard data only goes so far, though.
Just because I have a loser on a trade that I entered at 9:45, doesn’t mean I shouldn’t enter at 9:45 necessarily. But the data is there. I can say whether I entered based on my max risk rather than based on a profit target. And more importantly, whether I stuck to my risk measures.
The “notes” section is particularly important. Any “lesson” that can be extracted from the trade is recorded here. Every week, I re-read the prior week. At the end of the month, I re-read the whole month’s worth of notes. That’s the thing about this market, we will always continue to learn.
I love knowing the date, time, entry, size and risk of each trade too. It let’s me replay the trade to see what went right or wrong. Literally. I subscribe to TradingView — well worth the price of admission given the commission-free world we now live in — and one of the key benefits here is trade replay. (Seriously, take a Pro Trial for 30 days free and try it.)
I can replay the trade on various timeframes to see what I could have done differently. I usually only do this for losers, or winners that I punched out of too early. Still, it’s been a very helpful way for me to improve.
Last Trading Tip – Position Size
Talk to some experienced traders or read a few interviews and you’ll be sure to hear about trade size. Trading with too much size will end one of two ways, and neither is good. Either the trade will move severely against the trader, potentially wiping them out, or it will cause them immense stress while carrying the position.
I have been in that situation before, too. The trade can deal a painful if not lethal blow to one’s trading account. That alone should be enough of a catalyst to reduce the trade size. Conveniently, that should ease the burden of outcome No. 2, as there’s much less to worry about.
For every trader, the rule of thumb will be different. Some will risk just a few basis points of their account value on a single trade. Others will land somewhere between 2% and 5%, while some will swing with 10% or more of their account equity on a single trade. I can’t tell you what’s right for you. Only that calculating your risk is an immensely important part of the process.
No one single trade should alter your life. Too much size and eventually things will end badly. Smaller size allows a trader to make mistake after mistake and still live to fight another day. It also allows them to think more clearly and reduces the risk of reacting in panic.
Good luck out there! Hopefully these trading tips improve your bottom line.