Learn how to improve your trading with our guide to trading strategies.
How to approach trading
Trading the markets is just like running a business - ideally the goal is to earn revenue, and like with any business, to ensure that your revenue exceeds costs.
To become successful over the longer term, it’s vital to establish good habits from the outset. These habits can assist towards the accomplishment of two goals:
- Achieve greater success over any given time period
- Increase your ratio of successful trades over time by learning from your mistakes
What can help you achieve these trading goals?
For one, before getting into any trade, you should know and quantify your exit strategy, especially your downside risk.
Before you enter into any position, you should know exactly where the ‘point of pain’ resides: where the trade must be cut in order to preserve financial health and the integrity of your trading account. Constantly allowing losing trades to go beyond this point is a recipe for failure.
Another habit of many good traders involves position-sizing. For every trade, a proper position size should be predetermined according to the size of your trading account. This can help you control and quantify your risk.
Obviously, a £10,000 trading account may use different position sizes than a £1,000,000 trading account. But, with any account size, it can help you avoid large losses if your positions are prudently and proportionally sized.
Many good traders also have a habit of not rushing into trades. Trading opportunities should be weighed and considered carefully.
This means that before any trade is entered, a detailed trading plan should be created and adhered to. Traders shouldn’t enter into any trades randomly or haphazardly, based on the emotions of excitement, greed, or fear.
There should always be rational reasons for getting into and out of market positions. The fact that a market is rapidly moving in one direction or another may not constitute a rational reason for getting into a trade.
Five key things to remember when you start trading
- Trade with the prevailing trend
Consider taking the path of least resistance and go with the flow of the current market.
- Establish a detailed strategy for entering and exiting trades
A detailed strategy defines parameters for getting into and out of trades so that there’s no ambiguity.
- Watch your downside risk and be prepared to act decisively to control that risk
Make sure that you’re disciplined enough in preserving your trading account so that you can live to trade another day.
- Trade with reason, not emotion
Human emotions (excitement, greed, fear) don’t usually lend themselves well to good trading.
- Avoid trading right around scheduled news events
Trading can become more volatile around news events and prices may move drastically within short periods of time. This can exclude the average trader from participating in these moves.
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