The development of a successful stock trader
Beginner Stock Market Investing, Online Stock Market Investing, Stock Market Investing Advice, Stock Market Investing Strategies
Most traders actually go through the following development phases in the order in which they are described:
-They start by looking for the perfect method, the Holy Grail of trading, the trading method that never fails and is 100 percent successful. After spending a lot of money on education and training by way of books and seminars, the trader ends up trying his perfect system in the markets and ends up losing more money. At some point or another of time, the realization finally dawns that there is no such thing as a perfect system.
-The trader also comes to the conclusion that method alone is not sufficient and that management of trading capital and money is as critical to success. He learns to limit the depletion of his capital by only risking a small proportion on each bet instead of risking too much on any single position.
-Finally, the trader begins to realize the importance of psychology in his trading as well as the behavior of the markets and the importance of reading market sentiment accurately.
In fact the development of a successful stock trader should be in the opposite sequence. The trader should begin by realizing the importance of psychology in two different aspects of trading:
-His personal psychological makeup and the impact it has on his style and method of trading
-The psychology of the market and the way it influences market sentiment and the behavior of the crowd.
These aspects are important to understand because even if a trade is placed logically, both the individual trader and the crowd are normally dominated by the twin emotions of fear and greed. For the individual trader, it is critical that his actions continue to be influenced by logic and common sense rather than by emotion. If this is not properly understood, no possible methodology in the world can help the trader to trade successfully. In the case of the crowd, you should always remember that crowds are dominated by a herd mentality. Regardless of logic, they will rush into markets out of greed and out of markets because of fear.
Crowds can often be wrong
Once the importance of psychology is understood, the trader should turn his attention to the importance of money management. The two important fundamentals for money management are:
-Establishing your risk parameters for each individual trade. Seasoned traders will assess each trading opportunity on the basis of the potential return. A rule of thumb that is commonly applied is to look for a 3:1 return. In other words, on an investment of $100, the potential upside should be $300.
-Establishing your risk parameters for your trading capital as a whole. As a rule you should invest no more than 2 percent to 3 percent of your capital on a single trade. This will enable you to contain your losses and to conserve your capital so that you can survive long-term.
Once you have understood the above, you should be convinced of the necessity of developing a long-term trading method. It does not matter what form of technical analysis to use to analyze price action. It should however be simple to implement, easy to understand and provide you with sustainable returns in the long-term.
Tags: Investing, stock, Stock Market, Stock Market Investing, stock trading, successful stock trading, trader, Trading