10 Trading Tips For Any Strategy
1. Find a Trading Method That Fits Your Personality
Becoming a great trader is a process of self-discovery. You can’t just replicate exactly what someone else is doing and expect to see success. This is because while their system may be appealing, it isn’t based on your personal beliefs about the market.
For example, if you don’t have much time to spend in front of the market, then you would be better off following a methodology with a much larger time frame than learning an approach that involves buying and selling within the same day.
Or, if you believe in buying undervalued stocks at lows and selling at highs then it wouldn’t make much sense for you to follow a growth strategy then either. It all comes down to your beliefs, personality, and lifestyle. At the end of the day, it is impossible to make someone else’s conviction your own.
The good news is that there are infinite ways to make money in the stock market. You can without a doubt find a strategy that suits your personality and needs if you look for one.
This is discussed right up front because while it seems like this might be obvious, it is quite often overlooked by new traders. This can lead to wasting months, or even years trying to find the “holy grail style,” which does not exist by the way. So, it is very important to understand this from the get-go and start by finding a proven style, or methodology that jives with who you are.
2. Trade With The Trend
The direction of the market should always be at the forefront of your plan.
Did you know 3 out of every 4 stocks follow the direction of the general market? Anytime you are trading against the trend you are putting the odds heavily against yourself.
“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right”Ed Seykota
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”Peter Lynch
The quotes above from Ed Seykota & Peter Lynch help hammer this point home.
Ed compares trading against the trend to trying to push a wave out when it is coming in. It is much less work and much more natural to move in the direction of the wave.
Peter Lynch‘s quote touches base on the fact that more people lose more money trying to pick major turning points in the market than the actual turning points would have cost in and of themselves. The average trader will often try to trade against a strong market in the hopes that they hit a home run on a sudden bout of weakness.
Unfortunately, what happens most of the time is that they get chopped up and lose even more money trying to anticipate a turn, than if they were actually trading with the trend and got caught in a period of general market weakness.
The bottom line is, the trend is your friend! If you want to greatly increase your rate of success and eliminate most of the friction between you and profitability, do yourself a favor and follow the trend.
3. Stay With Your Trading Strategy After A Few Losing Trades
The quote above by Mark Douglas says it best. The typical trader will usually begin searching for a new strategy when they take a few losses in a row. However, this is completely normal.
Unfortunately, new traders become too focused on the strategy itself and attempt to be the first ones to figure out the science behind a perfect strategy. I’m not sure if this is because there are so many folks out there promising the perfect, holy grail strategy, or if it’s just our nature to believe that it exists.
The truth is that there is no perfect strategy. Refer back to trading tip #1 above. The perfect strategy is the one that has been proven to work overtime and matches your goals, personality and lifestyle – that’s it.
Nobody, not even the most veteran traders can predict what will happen next with 100% accuracy. In reality, it’s not anywhere close to 100%. If you want to become a consistently successful trader, you need to understand that you are in the business of managing risk vs. reward.
All you can do is identify that the likelihood of something happening is higher than something else and then manage your risk accordingly. If you continue to do this over and over, as long as you have an edge and actively manage risk, you will ultimately come out ahead, despite taking plenty of losses along the way.
So, next time you take a loss, try not to take it too personally. Sometimes you can do everything perfectly and you are still going to take a loss. That’s part of being a consistently successful trader. If you are always hopping from one system to the next, you are guaranteed to stay stuck in the mud.
4. Post Analysis Is The Secret To Success
Why do 95% of traders fail? I believe it is because likely 95% of traders don’t have a detailed trading journal. If you are serious about trading then that means you need to put in the work.
“90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.”William O’Neil
The truth is you need to work harder. Why a trading journal? Because it is how you are able to analyze exactly what is working and what is not.
The bottom line is, a trading journal allows you to easily identify where you should be focusing. Once, you understand what is working, you can do more of it and when you understand what isn’t working, you create a rule for yourself so it doesn’t continue. If you are inconsistent in your actions, you are going to be inconsistent in your results.
By maintaining a trading journal and doing post-analysis, you can answer extremely important questions like…
What is working? What am I doing right?
What is not working? What am I doing wrong and how can I fix it?
What base pattern or type of trade do I have the most success with?
If you want to really juice up your journal and do some great post-analysis that will exponentially speed up your learning curve, you need to be writing down your thought processes for each trade. Why did you place the trade? Why did you exit the trade? Did you follow your original plan, or were you calling audibles along the way?
Recording your thought process allows you go back and analyze valuable information that you just can’t ascertain from the numbers alone.
5. Ignore The News
The news is not your friend! Keep it off! Before news affects a stock, you will most often see it show up in the chart first. Never forget, the stock market is the ultimate discounting mechanism. Buying or selling a stock in reaction to news is like looking in the rearview mirror to drive your car forward.
The fact is, the only thing you need is price and volume. Remember, it’s not the actual news that is important. It’s the reaction to the news that matters. Hence the phrase, “price is news.”
Large institutions can take weeks and months to accumulate a position, making it impossible for them to hide their tracks. Therefore, you will almost always be able to spot their tracks left behind on the charts.
If you could make consistent progress following the news or by taking advice from others, wouldn’t everybody be rich?
The news does not have your best interest in mind. Their job is to be sensational and drive ratings. Not to mention, the majority of what they say is often irrelevant, or incorrect.
So, it is extremely common to see a ton of articles and news stories discussing how rosy the economy and the stock market is near a market top. Conversely, near a market bottom, you will very likely come across a ton of news telling you how the world is about to end and the stock market is a dangerous and stupid place to put your money.
6. You Don’t Need To Know Everything
When we all start trading, we make the mistake of trying to learn absolutely everything. The funny thing though, is that the most veteran traders will admit they still know nothing.
Why is this?
The market is a never-ending learning experience. There is an endless amount of information in a constantly changing environment. It would be impossible to grasp all of it. And that is where the mistake is made, in trying to learn everything and anything you can.
The good news is that you don’t need to learn everything, not even close. In fact, the less you know the better off you will be… technically.
The key is to focus in on a small area of market knowledge and make it a never-ending journey to learn everything you possibly can related to that one specific area of the market. Everything else is irrelevant!
In general, you will find that the people that appear to be really confident they know it all, rarely have the performance to back it up. The traders who admit they know nothing and always have something to learn still, are typically the ones outperforming the market year after year.
Let me say this:
- You don’t need to know which way the stock is going to go next.
- You don’t need 4 monitors.
- You don’t need any fancy indicators.
- You don’t need to know the name of every candle stick pattern.
- You don’t need to know every type of chart pattern.
What do you need?
- An edge
- Proper risk management
- Emotional Intelligence
That’s it. Don’t overload your brain. Keep it simple, clear and focused, which leads us to number 7 of our trading tips.
7. Keep It Simple
Keep it stupid simple!
The only thing that matters is Price & Volume. Everything else is noise.
If you have a bunch of different indicators on your charts, you are always going to get conflicting signals. You will then hesitate to act because each one is telling you something different. How about all of the time and effort that it takes to focus on all of those indicators in order to finally validate your opinion and execute your trade? Not to mention, all of that wasted time and effort ultimately takes away from what really matters…
Interpreting Price & Volume!
For the most part, having too many indicators on your charts will tend to distract you from the price /volume action, which is really where all your focus should be.
Keep your approach simple! Price, volume, and maybe one or two indicators if you have actual validation from your trading journal that it is helping you.
The market requires you to make swift decisions. When you keep your focus small, on what matters, and you do it very well – that is when you will find consistent success in your trading and be able to make those decisions much more quickly because you are able to instantly decipher what the charts are telling you.
8. Have Rules, But Not Too Many
Most new traders make the mistake of thinking the market is black & white. They look at it as pure science and try to find all of the answers. However, those answers do not exist and never will, because the stock market is as much of an art, as it is a science.
Traders and investors learn quickly that the stock market works as if it has a mind of its own. Just because A happens doesn’t mean that B has to happen.
Remember, human nature and emotions come into play in a big way, so who you are as a person will ultimately be reflected in your personal experience with the stock market. Learning how to successfully and consistently navigate the stock market is a personal journey. No two people’s experiences or processes will be exactly the same. There is no one right way. There is only what’s right for you!
This brings us to having rules. You need to have a list of rules that you agree are non-negotiable – especially as a new trader. This will save you from a lot of trouble. An example would be always cutting your losses while they are small.
Keep your list concise. Too many rules will cause you to hesitate when it is time to act. You can’t be too rigid in your approach or you will miss amazing opportunities!
Some of our best trades came from opportunities that may not have fit our criteria 110%, but we recognized enough winning characteristics to establish a legitimate edge. As long as risk is properly managed and you have your concise list of non-negotiable rules in place after you pull the trigger, you don’t have anything to worry about.
9. Follow The Relative Strength
If the market is correcting and software names are holding up well relative to the rest of the market, that’s Relative Strength.
What is so important about Relative Strength?
It shows you the hands of the big institutions. If the general market is selling off 30% and a software stock is still near 52-week highs, that’s telling you it is strong. This is because the big institutions have no interest in selling and in many cases are slowly accumulating shares.
When this happens you want to put that stock on a list and track it every day, because when the market resumes its uptrend, it will quite often be the first and strongest stock to advance.
Relative strength helps identify what the big guys don’t want to sell, or are buying more of. By following it, you will always tend to be in the biggest market winners.
We wrote an article on how to add the Relative Strength Line to your own charts.
10. Institutional Sponsorship Is Key
Extremely large banks, mutual funds, hedge funds, trust companies, and other large financial institutions account for over 70% of the market’s total volume. Some of these companies manage hundreds of billions of dollars. So when one of their portfolio managers decides to take a position in a stock, it can take weeks to months for them to accumulate a full position.
Adding to this, there are still all of the other fund managers out there with enormous portfolios to invest, who also decide to take positions in the same stock, which takes a similarly long time to accumulate adding volume and buying pressure to the stock.
It is very difficult for large institutions to hide their tracks, especially when there are a bunch, all trying to pile into the same stocks at once. This is why it is so important to pay close attention to either heavy volume accumulation or distribution. It is often a big clue that big institutional players are entering or exiting a stock, which is what ultimately drives a stock’s price.
At the end of the day, you want to buy stocks that the institutions are buying, since they are the ones moving the market. It doesn’t matter how much you believe in a stock’s story, or how strongly you may think it is going to go up. The bottom line is, it’s likely not going to move in a healthy, sustainable manner if the big institutions aren’t ultimately behind the buying and there to support it on weakness.
The good news is we don’t need to know what they are going to buy before they buy it. As we mentioned above, it takes a very long time for them to accumulate a full position and on top of that, there are many institutions all trying to pile into the same stocks at the same time. And we know that we can identify this on the charts.
Our job is to identify institutional accumulation as early as possible and then ride their coattails higher for as long as we can.