This quote by Larry Hite sums up in one sentence the reality of the markets we trade in:
“Frankly, I don’t see markets; I see risks, rewards, and money.”
We can have two traders enter the same trade at the exact same time, one can end up in a winning trade while the second trader will lose. Same entry, two outcomes.
WHY? What is the top skill required to be a successful trader?
If you ask traders for their opinion, you will probably get different answers. Our research team believes one skill is crucial to maximizing the return on your investment; Managing your emotions before, during and after the trade. In fact, “successful trading is always an emotional battle for the speculator, not an intelligence battle”, and that is confirmed by the great Jesse Livermore.
So how can we keep our emotions in check? One word comes to mind: Clarity
Investing tip 1: Define your investment style, and apply it in a consistent way
This is the most fundamental question: Are you a trader or an investor? What’s the timeframe you are investing or trading on?
- Are you a Position Trader? You are comfortable from months to years.
- Are you a Swing Trader? Usually holding from days to weeks
- Are you a Day Trader? Never holding overnight positions and closing daily.
- Are you a Scalp Trader? Usually scalpers hold positions for seconds to minutes. No overnight hold.
You must ensure to apply this in a consistent and consequent way. You see, trading or investing is just like running a business: it can be hugely profitable, but you have to discover the method and process that creates profits in a repetitive way over time, and enforce consistent application of that method and process.
Investing tip 2: Define your strategy
What are you trying to achieve and what are you willing to lose?
Set the proper filters to find a position that matches your trading style. Are you looking for a value play (buy low, sell higher)? Momentum play (buy high, sell higher)?
Set your entry/exit. An exit strategy should include both a profit target and a stop loss. This is when a solid technical analysis comes into play.
Do you research to understand what you are investing in. Evaluate what could potentially jeopardize your position and define your risk reward ratio.
Manage your exits based on your risk/reward ratio and your timeframe. A proper game plan prior to starting a trade reduces the time needed to make decisions when you are in the trade, therefore reducing the risk of having your emotions dictate your next steps. In short, define your risk and reward so you don’t have to worry about them during the trade.
Pre-setting orders, stop losses and trailing profits is another way of reigning in your emotions and ultimately controlling Fear and Greed.
Investing tip 3: Know yourself and know when to stop
This is probably the hardest part since it involves detachment and changing habits. Although sometimes identifying and sticking to simple practices can make a considerable difference on a trader’s productivity.
Traders don’t like exiting with a loss and for most, the natural reaction is to try and make up the loss. A common scenario is over-leveraging or over-trading after consecutive losses, which might put the trader’s capital at risk.
This is the emotional state inside yourself taking control over yourself. That is a recipe for disaster. Controlling yourself, controlling your emotions, is, by far, the most challenging part of investing and trading.
This is when the ability to stop and redefine objectives can make a huge difference. A simple walk after a losing trade can help a trader detach from the previous experience. Sometimes it might be a vacation after a losing month. Why? Because trading involves processing patterns and sometimes to be the sharpest, one needs to stop and reset. And most importantly, to know their strengths and vulnerabilities.
Bonus tip: force yourself to develop an objective view
One advice that comes from InvestingHaven’s research team, not written by anyone else before, is to seek tactics and tricks that oblige an investor or trader to stick with the facts. For instance, our team applies a strict method when looking for greatly profitable setups in markets or stocks, i.e. “find the proper chart set up, then do the research to understand the (fundamental) story … that way investors do not see what you want to see in a chart.”