1. Remove Emotion From The Equation
As I mentioned above, successful traders are those who have removed emotion from the equation. A stock does not increase in value because people think it will go higher; rather, it does so because traders and investors have made the conscious decision to allocate capital toward it. We all know this, but often forget it in the heat of the moment. Before you submit your order, reflect on why you’ve decided to enter the trade. Is it because you “just have a feeling that it will go higher” or that you conducted thorough technical or fundamental analysis?
2. Don’t Chase Anything, Ever
Seems simple, right? Buy low and sell high, they say. But this is much easier said than done due to the interference of emotions. Everyone wants to make money, but more experienced traders know that more often than not, chasing a stock will result in losses. In theory, this makes sense. Take the scenario of people sitting at their monitors, just like you, and watching the same stock spike right before their eyes. Before they can even enter the trade, thousands of share have traded hands and the stock spikes even more. By the time your trade goes through, it is likely that much of the air has deflated and the stock begins to rapidly descend from its high, as money managers are ripping the carpet out from under you before you can even realise it. Learning not to chase a stock higher (or lower, if you’re on the other side of the trade) comes with experience. If you’ve fallen victim to the scenario I just played out, use it as a learning experience.
3. Be Patient, Young Grasshopper
The previous two points go hand-in-hand with patience. It is advantageous to wait for a stock to show signs of a bottom before attempting to catch a falling knife. Likewise, it is smart to deal with the short-lived pain of seeing a stock spike before your eyes for the rewarding feeling of purchasing shares after its descent. Moreover, make sure you wait until your prospective trade has fully setup to your specifications, and don’t assume that any indicator will produce a buy/sell signal. Always confirm before you earn.
4. Bulls Make Money, Bears Make Money, And Pigs Get Slaughtered
So don’t get greedy. If you’ve used technical analysis to project a price target and the stock is currently trading at that level, place the sell order and do not change it. This applies to both long and short positions. He who believes that they can squeeze more return out of their trade — the inexperienced trader — is often compelled to sell at a smaller gain. Remember that any profit is a good profit.
5. A Penny Saved Is A Penny Earned
Losing money sucks. No trader is in the industry of losing money. If you’re looking at a lacklustre trade setup for the hope of making up for yesterday’s bad day, you’re breaking rule number 3 and not realising that money saved is money earned. It hurts more to lose money than it feels good to make money. Remember to be diligent and be content with earning and losing no money.
6. Know Your Risk Tolerance
Every trader is different, and only you know your risk tolerance. Are you the type of trader who can risk 20% to make 20%, or do you feel the need to have a much higher risk/reward payout in order to enter a trade? Be sure to define your risk before placing any trade orders. Doing so helps ensure that you have an exit strategy, which is arguably just as important as your entrance strategy. A little extra work in the beginning can make all the difference in the end.
7. You Won’t Be Right All The Time
Even the best traders aren’t right 100% of the time. But to be a good trader, you just have to be right more often than you’re wrong. Think of it like baseball: the Hall of Fame hitters are those who got out 7 out of 10 times. While this would correlate to a lot of red in a stock portfolio, the idea remains the same. You won’t, and don’t have to be perfect. If you follow in the footsteps of the successful Wall Street traders, then being right more than you’re wrong will come easily.
8. Learn From And Cut Your Losses
Because you won’t always be right, you’ll undoubtedly experience some losses. The stock market is incredibly humbling, and a long stretch of winning trades can instantly be cut short by devastating losses. But losing trades are healthy in the long run of your trading career, so long as you learn from them. Ask yourself why the trade went awry, and learn how to minimise similar mistakes in the future. Also, make sure that you exit a position as soon as your risk is fulfilled or a technical barrier — such as support, resistance, volume, etc — has been broken.
9. Don’t Turn A Trade Into An Investment
If you’ve entered a trade, it’s most likely due to a technical or fundamental catalyst that caught your eye. For example, you may have bough-ten a stock because you thought its earnings would beat estimates. Even more, let’s say the technical setup is incredibly bullish and signals that the stock will exhibit upward moment. Unfortunately for you, though, the company’s earnings are lacklustre and the stock falls sharply. What do you do now? Do you hope that the stock rebounds in the near future, giving you a better exit point? Hopefully not, because once a trade goes the opposite direction and you decide to hold onto it, you’ve turned that position into an investment. If you created a position with one intention, make sure you exit it with the same and don’t change your thesis to justify the price movement.
10. Take Technical Analysis With A Grain Of Salt
The thing about technical analysis is that it works until it doesn’t. As illustrated by the example above, a stock may have a bullish technical setup that isn’t supported by its fundamentals. Even though traders can cross out the name of a stock, conduct technical analysis, and make a decision regarding its future price movement, the best traders recognise that a fundamental hiccup can trump even the best technical story. Make sure you take the time to research the sector and industry of prospective stock, and make note of any sector-, industry-, or stock-specific catalysts before outlaying any capital.