Step By Step
|Newer traders and students of mine often complain of feeling overwhelmed or pressured to make trades. This is completely unnecessary and something that is detrimental to a trader’s success. One of the things I have learned, as both a trader and a trading instructor, is that we need to have patience and wait for the markets to present the opportunities to us. A wise trader once told me, “We don’t invent, we discover.”
You may be wondering what that means. When we analyze the markets, we need to analyze what price is telling us about where it is most likely to go and how we could take advantage of that movement. We need to remain objective and analyze all possibilities for price movement. What we want to avoid is using our emotions to subjectively impose our opinions on price charts. The markets will never bend to our will, as much as we would like them to sometimes.
Once we start to overcome this emotional rollercoaster, we also need to tackle the overwhelming “need” to make trades. Most people are trading to either; make income, replace lost income, supplement income, supplement retirement, or improve their retirement. Traders and investors will often look at a yearly number that they “need” to earn in order to live the lifestyle of their choosing.
The problem with setting goals on a yearly basis is that the number often seems insurmountable or difficult to achieve. Psychologically, we will then pressure ourselves to take additional trades in order to reach this goal. The pressure to perform will often force us to enter into positions that we would not normally enter into if we were not under this pressure. So, how can we remove or reduce this pressure? The best thing to do is to divide your yearly goal into smaller, more manageable goals. Let’s imagine that you are a newer trader looking for a $25,000 a year income from trading. This may seem like a large goal to many people and again the pressure builds. But, when we take the $25,000 sum and divide it by 250 (the approximate number of trading days in a year), we find that we only need to achieve an average of $100. On a stock trade, this is a one dollar move on 100 shares.
The funny thing is that it doesn’t take any more physical effort to buy more shares. Of course, mentally this does change things quite a bit, but once you are comfortable trading your smaller share size, you can steadily increase your position size to shorten the duration of your trades and still reach your daily targets. If you need $50,000 a year from the markets, a $200 a day profit would get you there. So you now need 200 shares to move one dollar in price.
Be careful not to exponentially increase your share size. Even though 1000 shares on a one dollar move would yield a $1000 profit, are you ready for a potential $333 loss in one day? Traders should risk no more than one third of the potential profit. Remember, just because you can afford to buy more shares, it doesn’t mean you can afford to trade more shares. Keep in mind the loss you would endure should your stop be hit. If it is more than one percent of your total account balance, you may be trading with too large of a position size.
Take your goals one step at a time and protect your capital. You need to build up your experience and instinct while you are learning how to properly trade and invest in the markets. Doing this under the watchful eye of expert traders like those at the Online Trading Academy is a great start toward achieving your goals.
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