This article appeared in the March 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Simple, practical beginners’ steps to make more money.
By Louise Bedford, author
Most people put more effort into planning their next holiday than their long-term financial future. The bleak truth is that the only way to live well tomorrow is to begin planning today. If you have chosen the sharemarket as to attain financial freedom, there are eight habits that you must develop.
1) Trade with the trend
If you want to make serious money in the sharemarket, trade in the direction of the overall market trend and you'll be amazed at the results. This sounds obvious, but in reality you will probably spend the rest of your trading life trying to achieve this goal.
Whether you decide to pursue fundamental or technical analysis techniques, work on developing your skills. Aim for perfection but be aware there is no particular technique or method that will work in all circumstances. Be rule-orientated but maintain a degree of flexibility and adapt to changing market conditions.
2) Set stop-losses
If you do not know how to set a stop-loss, stop trading immediately! An initial stop-loss (a predetermined point at which you sell) is designed to preserve your trading capital. A breakeven stop will help lock in a no-loss trade. A trailing stop (this involves lifting the stop-loss point as the share price rises) will assist in preserving your profits. Learn how to set a stop and then follow it. Contrary to popular belief, if you exit on the basis of a stop-loss, the world will not abruptly stop spinning. But you will live to trade another day. If you can keep investing in the markets for long enough, you are bound to learn the secrets about how to succeed.
3) Use a written trading plan
When I aim to trade well and to follow my trading rules, money flows into my account.
Detail your position-sizing rules (the amount you allocate for each trade), share entry and exit triggers, and list the markets you will participate in. This small display of discipline is one of the keys that separate professional traders from unprofitable try-hards.
4) Develop money-management skills
Money management is the part of your trading system that tells you how many of a particular share you are going to buy or how much of your account will be committed to a given market. The most effective traders have a method of attributing a greater percentage of their capital to low-risk, high-probability trades. Higher-risk trades are still entered into, but a smaller position is taken.
In all games, the difference between the amateur and the professional is that the professional plays the odds.
5) Remain detached
The only way to trade well is to aim to be a good trader, rather than to make money. I have personally found that every time I demanded that the market provide me with a certain monetary return, then profits became ridiculously elusive. However, when I aim to trade well and to follow my trading rules, I make money. It's a frustrating game. Successful traders have had to learn how to handle the inevitable losses.
6) Use an appropriate instrument
For some reason, novices seem attracted to the futures market like beetles to a bug zapper. "The more volatile the better," they cry as they launch themselves headlong into financial oblivion. Begin with shares, and trade them successfully for at least a year. Once you have proven yourself in this, you can move on to leveraged instruments such as options, CFDs, warrants and futures.
Learn how to take advantage of a bear market. By using short selling, CFDs and options as part of your strategy, you can make money whatever the market is doing.
7) Persist in the face of adversity
The only way to pass Share Trading 101 is by attending the school of hard knocks and staying in the trading arena, even when you feel like quitting.
Take responsibility for your own financial future. You are perfectly capable of learning how to trade. You can do this. You will ultimately be successful if you put in the effort and learn from your mistakes. There are others who may have more knowledge than you at this very moment, but you have the resources necessary to develop your own strategies. Any negative people that doubt your skills have underestimated your tenacity. Stay committed and focused and you will achieve your objectives.
8) Realise that you are worthy of success
A lot of people amputate their own success because they feel unworthy. Unworthy of the rewards of trading, unworthy of being happy and definitely unworthy of greatness.
This is why we must continually find people to boost us and see the best in us. Without support, our mind gets claustrophobic and we never see how incredible we can be. Just like Vitamin C, it seems our body can't store these positive thoughts easily. Unless we get continual shots of positive, our minds drift towards the negative.
About the author
Louise Bedford has a free five-part e-course at www.tradinggame.com.au. She is also the author of The Secret of Writing Options, The Secret of Candlestick Charting, Charting Secrets and Trading Secrets. Register to get her free monthly email newsletter and free five-part e-course.
The ASX Sharemarket Game is one of the world's great real-time trading games and the only type of its kind in Australia. Each player has a notional $50,000 to invest over 10 to 15 weeks, with a maximum of 10 orders a day to buy and sell. No more than 25 per cent of the portfolio's value can be held in one share.
ASX Sharemarket Games provides more information on the Schools and Public sharemarket games.
The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.
© Copyright 2013 ASX Limited ABN 98 008 624 691. All rights reserved 2013.