5 top trading tips

Photo of Stuart McPhee By Stuart McPhee

min read

On the surface, you wouldn’t think there would be too much to trading shares: you only have to buy and sell; what more could there be?

As anyone will tell you, there is a lot more to it than you initially think. This might be the first tip to getting started in trading equities.

Here are five rules to consider:

1. Be well prepared
Most traders will agree that to be successful in the markets you need to develop a trading approach that is right for you and suits your personality.

First, I would suggest conducting a self-assessment to determine the following:

  • Your own goals and objectives in entering the market.
  • Your own personal strengths and weaknesses.
  • Your tolerance of risk.
  • Your patience.
  • The amount of time you are prepared and can afford to commit to trading.
  • Your level of self-confidence.
  • Your discipline.

Questions regarding your money management include:

  • What is your trading capital?
  • What is your risk amount?
  • How will you determine your position size?
  • What is the maximum amount of your trading capital you are prepared to commit to a single trade?
  • What will be your maximum risk exposure at any one time?
  • How will you determine your initial stop-loss level?
  • How will you determine your trailing exit level or profit target?
  • After losing what percentage of your capital will you cease trading?

Questions regarding your entry decisions are:

  • What financial products will you trade on what market?
  • Over what timeframe will you trade and how will you identify trends?
  • Will sector analysis play a part in your trading decisions?
  • What conditions will you use to determine a trade entry?
  • Will you trade “at market” or “at limit”?

2. Develop a trading plan
Having a trading plan facilitates your decision-making by helping to remove some of your emotions from the equation and, therefore, will make you trade more effectively. The best way to ensure you get the most from your trading plan is to write everything down.

Your trading plan should take into account three broad areas:

  1. Your trading mindset (or psychology).
  2. Your money management (position size, pyramid strategies, selecting exits, etc).
  3. Your trading method (requirements for trade initiation, filtering processes, daily routine and so on).

On my website you will find a free trading plan template that can help guide you through the different parts of your trading plan.

One thing I have experienced over the years is many people accept that a trading plan is an essential requirement to trading well, yet they do not know where to start to put one together.

I will simplify this. There are three key decisions you need to make when trading and if we think in these terms and your trading plan answers each question, you may have the makings of a simple yet robust trading plan.:

  1. Under what circumstances will you enter a trade?
  2. How much money will you commit to the trade?
  3. Under what circumstances will you close the trade?

3. Follow a trading process
Once you have attended to all those items, one of your final steps should be to compile all your rules and conditions into a written trading plan. To facilitate adherence to the plan, develop a routine (that is, trading process) that will guide you through all the necessary steps and will stop you being distracted by other matters.

The seven-step process is a logical one traders work through and provides some structure and a framework to work with:

  • Step 1: Monitor and assess existing trades/adjust stops or exit where necessary.
  • Step 2: Scan for potential trading opportunities.
  • Step 3: Obtain shortlist from Step 2 and select trades.
  • Step 4: Determine initial stop-loss.
  • Step 5: Calculate the trade/position size.
  • Step 6: Execute the trades.
  • Step 7: Do something else and let your trades run their course.

4. Lay the foundations
A rarely considered part of trading is laying the right foundations. Stocks are arguably the least difficult financial product to trade; therefore, they provide the ideal starting point for new traders. Yet it is amazing how many people switch to a more difficult product after finding they can’t trade stocks profitably. “Well I can’t trade stocks, so I’ll try something else,” is a common thought.

The reality is that if you cannot trade stocks well, then you have less chance of trading more difficult products profitably.

Other leveraged products that seem to attract people are things such as derivative products – futures, options, contracts for difference (CFDs) – and, more recently, foreign exchange. What isn’t helping this is how easy it is to trade these products.

While these leveraged products all offer greater potential for reward, with this comes the certainty of far greater risk and therefore the possibility of losing your money. My experience is that not only do people lose their money switching from stocks prematurely, but they lose more of it and more quickly.

In a more general sense, I urge new traders to consider the following when starting out: develop the right attitude, set and write down trading goals, work on your discipline, work on your patience, commit to your future and take action, and stop wasting time on things that don’t matter.

5. A final few words
Some points for consideration:

  • Be humble. You are not going to get every trade right. In fact, you will be proven wrong very often.
  • Be committed. Trading is not easy and any half-hearted attempts will get you nowhere.
  • Educate yourself. There is so much to learn and while you can learn from actually trading, you can save yourself a lot of money and stress by learning from someone else who has done it before you.
  • Take it slowly/be patient. Trading success is not going to happen overnight. For most people, this is a life-long endeavour and for many more it ends in frustration and lost money and time.
  • Keep it simple. People have a tendency to overcomplicate matters and develop intricate and complex solutions to problems. When we accept that trading is not easy, we think only a complex solution (trading plan) will work. In trading, simple does work.
  • Be realistic. Having high expectations of yourself is a good thing. However, having unrealistic expectations is not. Many traders can be very easily led to setting unrealistic goals for their trading.
  • Focus on the right things. Don’t focus too much on your entry signal, as most people do. Keep it simple and then move on to the more important areas such as position sizing, setting exits and preparing your mind for successful, disciplined trading.
  • Whatever you do, protect your capital. It goes without saying that if you have no money left, you can’t make money.

About the author

Stuart McPhee is a private trader, a best-selling author and personal trading coach, and has consulted to numerous financial services companies in Australia and South-East Asia. He is the author of the best-selling trading book, 'Trading in a Nutshell, 4th Edition' (John Wiley).
Follow: @stuartmcphee

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