Outside the Box: Suggestions for Becoming a Better Trader
January 9, 2008
Now that we’ve entered into a new year, it’s a good time to discuss some valuable ideas about beginning and managing our trading business. Numerous factors are important in achieving success. This article will focus on the key skills needed, as well as the key areas that must be managed effectively to ensure a profitable endeavor.
One of the first things a trader must be able to do is to take a loss when it reaches the predetermined amount. Sounds simple, but many traders have ignored this key rule only to see severe damage to their accounts. In fact, refusing to take action and waiting for the market to prove you right are the biggest reasons why traders go out of business. It is very important that a trader keeps losses to a manageable level and does not allow them to turn into catastrophic losses.
Another key piece that needs to be in place is to have a trading plan that outlines what to do if the market advances, declines or moves in a sideways pattern. Remember, the market will do what it wants to do and as traders we have no control over it. However, we can control how to respond to it, which is why it is so important to have a plan detailing how positions will be managed, adjusted and closed.
In addition, you should never become married to your positions, nor should you second-guess your trading decisions. If you continue to spend your energy recreating how you arrived at a current position, you are misdirecting you efforts and will miss new trading opportunites. Traders need to understand their own tendencies and inclinations. For example, are you a trend follower or prefer identifying turning points? Do you like to take profits quickly and delay taking losses or vice versa? As a trader these are important things to know about yourself before designing a trading plan that you can execute.
It is also important to keep exposure in any one market or sector small relative to your account. The trader needs to diversify among different markets and should ease into positions over time. For instance, adjusting positions that become unbalanced will help achieve profits, but don’t underestimate the virtue of entering small, high probability positions over time in a diversified mix of markets.
Finally, another useful trading principle is to become very familiar with the particular markets you choose to trade. For example, option traders should study the volatility charts of each market to know if current volatility is relatively high or low from a historical viewpoint, and also to determine if it is relatively high or low. Know the volatility skew of different markets because it is important to understand if the out-of-the-money calls are more expensive than puts, or vice versa. Keep all these trading principles in mind as you continue with your trading career.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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