10 trading tips for 2011

By Gary Stone, Share Wealth Systems

It has been a year of ups and downs and as always, many traders and investors have done well while many have not performed quite as well as they would like. At the end of 2010 the market continues to provide opportunities to make profits, and to learn from mistakes. As always, those with a disciplined and professional approach to their investing activities will be best placed to take advantage of opportunities as they arise.

Here are 10 trading tips that will contribute greatly to your success in 2011 and the years ahead.

1. Put your trading plan in writing

The key to success in any of life's endeavours is to have a written plan to achieve success. This can range from a business plan for those operating their own business, to a training plan for professional athletes. Your trading activities also need a plan, or roadmap, you can use to engage the market. This will provide structure and purpose to enter trades, and a valid set of rules and guidelines to undertake trading and investing activities. The plan should include your "why", your financial and skills goals, how you will enter and exit each trade, and how much capital you will put into each trade. It should also outline how you will manage company, sector and market risk, among other risks. Your plan need not be huge or extensive, but it must fit your personality and lifestyle, and contain specifics such as goals and trading strategy.

2. Plan your trade and trade your plan

Not only is it important to document your trading plan, it is important to stick to the rules you have agreed to use. Many people go to the time and effort of writing a trading plan, then fail to commit to it when the time arises and the opportunity presents itself. They fall victim to their emotions or the views expressed by a so-called expert, or a variety of other outside influences - and either do not place a trade, take their profits too early, or fail to take their stops.

To assist in this process I have made available a free trading plan sample you can access here.

3. Be objective and consistent

Perhaps two of the most important characteristics displayed by profitable traders and investors are objectivity and consistency. If you have a system or methodology for engaging the markets that is based on objective analysis, rather than subjective and arbitrary appraisal, then the consistent application of the signals for when to buy and sell will provide you with an edge. This mathematical edge will enable you to achieve results that consistently outperform the market over the long term, thus ensuring long-term profitability.

4. Manage your risk

Risk can be categorised into two main areas. The first is individual trade risk that relates to the downside potential of any one position within your portfolio. For each of these trades you will have a clearly identified stop-loss - the price at which you will accept that you are wrong, cut out of the trade and move on to the next opportunity.

The second is overall market risk that relates to the potential for the market to have significant and often untimely corrections. We can manage the first on a trade-by-trade basis. For the second we need to be aware of, and adjust, our overall risk in line with market conditions. We can do this by reducing and increasing exposure in line with market ups and downs in the timeframe in which we trade.

5. Execute your trades with confidence

If the system you are using has a proven track record over a reasonable time and large data sample, and generates profits, then each and every time a buy or sell signal appears (capital permitting) it must be executed with confidence. Confidence cannot affect the outcome of a trade but lacking confidence will cause traders to not take trades that they should, and hence take the trader out of the opportunity flow of the market.

6. Take your exits

In line with tip number 5, exiting (selling) trades is vitally important. This applies to exiting winning trades as well as cutting losses on losing trades. If you have a system that exits profitable trades when a particular profit target price is reached, then do it. If you use a trend-following system or strategy that exits profitable trades on the breach of a trailing stop, then do it, immediately and without question. Otherwise very large loss trades can result in a wipe-out of hard-earned profits.

7. You don't have to be right in every trade to be profitable

It does not matter which trade delivers you a profit. Active investment is about finding high probability trends, but not every trend will rise to ensure a profitable outcome. This is why it must become easy to exit trades according to the rules, whether they are in profit or loss at the time. Do not hold on to a trade because you want to make more profit or less loss in that particular trade. Accept that you are wrong on this occasion. Detach yourself from your prejudices about past profit or loss trades. You do not know what will happen next, nor do you need to know to be successful in the markets.

8. Be prepared for drawdown and know how to manage it.

All markets and trading strategies experience drawdowns - when they give profit back. No strategy ever makes money all the time across all market conditions. They will make money when they are in sync with the market, and they will give some of the profit back when they are not aligned with the prevailing market conditions. Know and understand this and do not live with a mistaken belief that you will always make money. Learning how to manage these drawdown periods, through the use of a hedging (shorting) strategy or holding funds in cash for a while, can assist with minimising drawdown. If your strategy has a proven edge it will come out of drawdown at some stage in the future.

9. Take responsibility for your decisions

If you do not take responsibility for your actions and results there will always be someone or something else (not you) causing you not to perform. This mindset allows you to continue repeating your mistakes because it is not you making the mistakes! This means you will never need to address anything to improve your performance because it will always be beyond your control. Learn to take responsibility for your actions so you can address any shortcomings and move on to grow and improve.

10. Measure your performance

You need some way of knowing your actions and decisions are working and providing a suitable return for your effort. You need a way of measuring your returns and performance against a relevant performance benchmark. For share traders and investors, this can be the All Ordinaries Accumulation Index. The harsh truth is that if you are not out-performing this index, you may as well put your money into a managed fund.

A new year opportunity

The markets will always provide opportunities for the educated and prepared trader and investor. The start of a new year is a great time to get your trading and investing in order - a great opportunity to make changes and begin a new investing journey, particularly if what you have been doing in the past has not been achieving the desired results.

Implementing these 10 trading tips will enable you to start the new year on a positive note and with a plan in place to achieve your investing goals. My best wishes for a consistent and disciplined approach to your investing activities in 2011.

About the author

Gary Stone is the founder of 15-year-old business Share Wealth Systems (formally ShareFinder) and is the designer of three commercially available trading methodologies, the best-known being the SPA3 trading system. He is a trader and continues to research the markets. He is a regular contributor to Sky News Business, ABC Radio, ASX Investor Update and Your Trading Edge magazine.

Download a free PDF copy of Gary Stone's Trading Plan Sample.

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