Trading Strategies: Free yourself from unwanted losses by keeping these trading strategies in mind
Every retail trader is looking for a trading strategy that will make them money on every trade. It is these pursuits in search of the evasive strategy that snake oil marketers exploit by selling trading strategies that will help them multiply their money in no time.
Some of the best traders in the market are more often wrong than they are right. For example, the trend following traders who make a lot of money when the market is trending is just less than four times out of 10. Show this record to any new trader and they wouldn’t like to learn such strategies.
The sooner a budding trader realizes that no strategy will make money all the time, the sooner they will be on the right path to becoming a successful trader. Trading is all about managing uncertainty and emerging victorious.
Losses cannot be desired, but they can be controlled. Professional traders know that trading means preserving capital and coming back another day to make money. The only way to preserve capital is to limit your losses.
Ask any professional trader and they’ll tell you that strategy selection contributes about 15% to their success. Trading is not at all about strategy.
Unfortunately, most retailers never get it. The game is about money management, risk management and mindset.
To succeed in trading, the journey must be made one step at a time.
Here are some steps a newbie trader should follow to reach the next level.
Have a game plan
A trader should have a detailed and well laid out game plan for trading which should look like a business plan. Details of the capital at stake, the stocks and indices that will be traded, and the time frame in which to trade should be mentioned in the plan.
Decide in advance how much will be at stake in each transaction. Professional traders never put more than one percent of their capital at risk. Compare that to a novice dividing their capital into a handful of ideas.
The trader must have a well-defined trading strategy with clearly defined entry and exit rules, including a stop loss. The strategy should be tested with enough data points covering all market conditions.
Back-testing should also include transaction costs like taxes and other charges, and there should be room for slippage. Only when the backtesting results are promising should the trader bet his money on it.
When to raise and when to lower is an important part of trading. Just as when you go on a trip you do not drive at the same speed in the city and on the highways, trading with the same amount will take a long time to succeed.
When all is well and the risks are low, the trader should scale up to get the most out of the move.
It is said that the most important book a trader can read is his trading journal. Save your trades and learn from mistakes rather than continuing with the same mistakes. This book alone can help you become a better trader than most of the advice we hear around us.
Losses are the expense of doing business. They will always be there. As long as they are manageable, a trader is in a better position and can hope for someday success. Losses are the only thing holding him back.
(The author is the CEO of TradeSmart. The recommendations, suggestions, views and opinions he gives are his own. These do not represent the views of Economic Times)