Deciding to begin the journey to start trading is one of the biggest decisions of your life. It’s a sport that is truly meritocratic. It’s not a team sport where you win and lose together. In the end, your P&L is your P&L – and if you lost money, well, you lost money.
But the rewards for success in this business are unlimited. There is no ceiling on how much you can earn, and the only limits are the ones you impose on yourself.
That doesn’t mean it’s easy – definitely not. The market will require demands of you that far outweigh those of your previous employer (should you ever become full-time). If you want an ‘easy’ life, then perhaps trading is not for you.
In this business, the market demands a certain level of respect. The freedom you believe traders have is a myth. You will rise early to begin work at 07:00, no matter where you are on the planet. Failure to pay these respects will see the market reach into your bank account and relieve you of your cash.
There are certain rules that need to be followed, and should you familiarise yourself with them and become accustomed with them, you will vastly increase your chances of success.
One attribute of consistently profitable traders is that they have (surprise!) consistency. They are consistent in their habits. They are consistent in their routines. They are consistent in their beliefs.
Being consistent will translate to consistency in your P&L. Trading is like working out in the gym. If you work out three times but stuff your face over the entire weekend, then you’ll look like someone who works out three times a week and stuffs their face over the entire weekend. But if you’re working out most days, and most of the time you’re fuelling yourself properly – then that is what you will look like.
“You may fool the whole world down the pathway of years
And get pats on the back as you pass
But your final reward will be heartache and tears
If you’ve cheated the man in the glass.”
Consistently profitable traders know that if they turn up, do the work that is required, and consistently work to improve their process, then their results will follow.
Following on from part one earlier this week, here are four more key tips for new entrants to the trading game:
Know your routine
Building a trading plan is based on developing “If this, then that” scenarios.
“If Delightful Drinks trades above 850p resistance, then I will go long.”
Once in the trade, it then becomes “If Delightful drinks can’t hold above the new support level and the tape shows lack of bid depth, then I cut then trade”.
Get used to knowing what you will do, when something happens. The more prepared you can be, the better equipped you will become to deal with whatever the market throws at you.
Develop a playbook
If markets were random, then it would be impossible to create consistency. But we can create consistency, so clearly markets are not random. And if Efficient Market Hypothesis was real, then it wouldn’t be possible to consistently profit.
There are many patterns in the stock market that repeat over and over and we can profit them these over and again. I am a big fan of the breakout and breakdown, as well as trading long and short from key levels.
Sometimes, certain setups stop working, so I stop using them and re-employ those patterns when they start working again.
Having a go-to book of trading patterns keeps a trader on the straight and narrow, and helps to prevent one from doing dumb things like averaging down heavily into a losing trade.
When you next take a trade, ask yourself: Is it part of your playbook? If not, then why the hell are you doing it?
An aversion to cutting losses is natural to humans, as we are by nature more inclined to be risk seeking with losers, and risk averse when it comes to winners.
This is exactly the opposite of what we should be doing, which is cutting losses and running winners.
Your successful in the stock market – for both traders and investors – will depend entirely on how good you are at these two things: hitting bids to cut losses, and driving winning trades to squeeze out more for the P&L.
Points, not pounds
When we’re new to trading it’s very tempting to always think in terms of pounds. Nothing can be more self-destructive, especially if you rely on trading to pay the bills.
When you think in pounds, you’re not managing your account – you’re trading your expenses.
Money clouds judgement. It also makes it harder to scale.
If you’re up 10% then you’re up 10%. It doesn’t matter whether your position size is £5,000 or £5,000,000. 10% is 10%.
One of the great things about the internet is that we now have access to a multitude of sources and free materials. There is simply no excuse for turning up to the market unprepared.
If you want to be successful in this business then the only thing that can stop you is yourself.
The market hates the lazy and it hates the unprepared. It despises them with a passion, and will remove those who do not pay their dues from the arena altogether.
You will live and die by your P&L, which will tell you exactly how you’re doing. This is our man in the glass. However, there are many things we can do to prevent becoming liquidity in the market for those with an edge. These six points are a great start.
Still want to get into trading? Good. But you have been warned.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.