Basic Trading AdviceTrading Plans
Trading seems extremely complicated, and it most certainly can be. This lesson will attempt to reduce more complex trading lessons into some very basic trading advice that you can easily follow.
Basic Trading: Buy Rising Earnings Power, Sell Falling Power
Many people simply buy because others told them to buy. You want to buy something that is increasing in earnings power, from Revenues and Profits, GDP, or value increases. You want to sell something that is not. This way you know that the underlying fundamentals are driving the price and not just a group of uninformed price followers.
Basic Trading: Trading Existing Trends
The rising earnings power must be accompanied by an uptrend. Many people buy companies just because the fundamentals are strong when the price isn’t moving up, and sometimes as it is moving down. They wait for a reversal, but by the time that reversal occurs, they could be stopped out or deep in losses. Trade actual existing trends, don’t trade reversals or guesses of future trends, or you could wind up trading into a consolidation or a loss.
Basic Trading: Ignore Rumors, Tips, and Hearsay
These typically come from people who are either uninformed or have no idea what they’re doing. Do the research yourself, and if you are going to trade a rumor or a hot tip, at least double check it according to the trading advice we’ve already given.
Basic Trading: Diversify Capital in Unrelated Trades
Putting all of your money in one trade is how you go bankrupt if that trade runs badly. Don’t put a large amount of your capital into a single trade. Nothing in the market is guaranteed; you’re dealing with billions of other people buying and selling in their own best interests. Just because they’re buying now, doesn’t mean they won’t dump their positions during the next paragraph of this lesson. They will if it interests them to do so.
Basic Trading: Only Add Money to Winning Trades
In addition to diversification, you only ever want to add more capital to a trade if the trade is delivering profits. Many people have a loss from the onset of a trade, then increase the size of the trade. Why? They assume when the trade turns around, because they just know it’s going to, the extra size will make up the loss and put them deeper in profits. Naturally, it never turns around and they just take larger losses.
Make sure your trade is a winner before you order a supersize on it.
Basic Trading: Limit Losses with a Hard Stop
Having a hard stop over a mental stop has one serious benefit. If you’re not at your desk when the trade moves against you, you typically won’t take losses larger than desired. It also forces you to plan a place where you will get out of your trade, and consider how much you’re willing to lose on that individual trade.
Basic Trading: Don’t Move Stop Too Close
You don’t want your stop losses to be so close that they take you out of a trend. But you also don’t want your stop loss so far away it loses a large amount of capital. Look into the concept of average true range and volatility to help ensure your stops are well placed.
Basic Trading: Move Your Stop Loss Closer to Lock in Gains Over Time
Moving your stop losses closer to price as your trades move deeper into profit helps to ensure that you reduce the amount of losses you could suffer as price moves further away from your original stop. Eventually, you will break even and start to lock in profits.
Like said before, don’t move your stops too close, even while moving your stops closer to the current price. You’ll be taken out of a trend that’s moving in your favor. Bad.
Basic Trading: Never Move your Stop Away from Price
Don’t ever move your stop loss away from the price. Only move it closer. When you move your stop losses away from the places your statistically based trading system says it should be, you increase your losses before you’re stopped out. This in turn increases the amount of profit your winning trades must give you to cancel out losses, and hurts your equity curve in the long term. Also, never, EVER, cancel or delete your stop loss. It’s there for your protection and to stop you from blowing up accounts in emergency situations.
Basic Trading: Let Winners Run, Cut Losers Early
The only way to be profitable is to let your winners be bigger than your losers. Let your winning trades run until they’ve reversed and give up their gains. Let your losing trades be limited in how much money they can lose, especially in relation to your winners.
Basic Trading: Have a Completed System
You don’t have a trading system if you don’t have set rules for your trade entry, stop loss, take profit, and capital size. And if you don’t have a system, you’re just winging it, and will lose money eventually.
Basic Trading: Don’t Trade Emotions
Do not trade how you feel. If you’re angry, greedy, overly-attached, or overwhelmed. Log off, take a break. Go for a jog. Talk to a friend. Don’t click buttons while angry at the computer, that’s how you lose money. You need to be in a clear headed position that lets you take the signals given by a profitable trading system without being cluttered by doubts and impulsiveness given by emotions.
Basic Trading: Remember What the Market Actually Is
One of the best pieces of trading advice is to remember what the market really is. The market is not some boogieman that’s out to get you and take your money, nor is it some mystical thing that you will always read and get 100% right. The market is simply billions of people across the globe buying and selling at the time they think is in their personal best interests. They buy when they think it’s best for them, they sell when they think it’s best for them, and they sit on the sidelines when they think it’s best for them. They aren’t after you, it isn’t personal, and you’re going to just be wrong sometimes. Don’t internalize it. The only thing you control is your entry and your stop loss. Everything else is just the market doing exactly what it should do.
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International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
Investment and Finance, Serviced by Amazon
A Concise Guide to Macroeconomics, Second Edition: What Managers, Executives, and Students Need to Know
A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
Algorithmic Trading: Winning Strategies and Their Rationale
Alternative Investments: CAIA Level I (Wiley Finance)
Alternative Investments: Instruments, Performance, Benchmarks, and Strategies