How to make money trading

How to make money trading? I guess all of us who got fascinated by the fact that one can live trading securities asked ourselves and others the question. It sometimes seems that making profits in financial markets has become a phenomenon of �Loch Ness monster� � everybody has heard about it, but who has really seen it. In the same fashion you have heard that it is possible to make money trading, but have not heard who has done it. There are quite a few people who live on the money they make trading stocks, futures and Forex. Read the series of �Market Wizards� by Jack Schwager to learn about the people and how they did it. Although, I have had mixed results in my trading career I can say that I have made more than I lost trading Forex. In the post I want to share with you some key elements that you should deal with before you can become profitable. Let me start.

Have an edge

What does that mean? You should notice some tendencies in the market you trade that happen regularly and they help you to make more money than to lose. There are some tendencies that happen from time to time and you can sometimes make money trading them, but in the long run you will lose more. Take time to find and test those ones that give you more profits than losses. Then form strict rules for trading them and start to trade. An edge can be trading multi months range breakouts, or trading chart patterns or simply selling at resistance and buying at support. It is important though that you test the tendency that seems to be working and see if it works long term. 

Have your own investing philosophy

Various investors see markets from different angles and they are still able to make money having different perspectives on what moves this or that specific financial market. You might be long term, short term investor or even day trader with a unique approach towards markets and be very successful. What type of investor you are going to be depends on your personality, needs, risk tolerance and available capital. The more risk averse you are the longer your time frames for investing will be. If you are willing to take significant risks you will probably be a short term trader (even a day trader). 

Have a plan and follow it

By having a plan I mean knowing what triggers a tradable situation, entry levels (and ways to implement it), trade size, stop loss and take profit orders. Having no plan means you do not know or understand what you are doing. When you sit down to look at your charts or analyze securities searching for possible trading opportunities you have to know what you are looking for. Is it a breakout, bounce off support or resistance level, touch of a moving average, overbought/oversold situation or market�s reaction to some fundamental news. You have to know what you do in each situation: trade, wait or do nothing at all. 

Wait for the best opportunities

A lot of traders lose money, because they trade too much by taking average opportunities that�s why they have too many bad or average trades. Waiting for those excellent opportunities provides you with an edge against the crowd. You should learn to skip mediocre trades till you start noticing the best ones. Impatience is one of the top enemies that a trader may have. It causes him to overtrade and miss golden opportunities. When those do finally come most trades are short of capital and cannot take advantage of them. You have to ask yourself whether you are in this business for thrilling emotions or for making money. If it is thrills you are after then better go to casinos. If it is money you are after learn to be patient and analytic while searching for patterns that do work. 



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Understand what moves securities you are trading

Why does a stock go up dramatically or plunges down? Why does Euro rise against US dollar or falls? What causes gold to rise sharply and then collapse? Some of these are fundamental questions and you can find clear answers to them. In case of stocks most probable cause would be earnings, in case of currencies it would be monetary policies of Central banks, in case of gold it would probably be inflation. These could be main ones, but not the only ones. In each situation you will have to dig to find the underlying conditions pushing this or that market up or down. If you look at a recent collapse in Google stock (18^thof October, 2012) you will find out that it was caused by worse than expected earnings. The stock plunged around 80 bucks in 10 minutes. In the same fashion ECB president Mario Draghi announced that he was going to do whatever it takes to save Euro (on the 25^th of July, 2012) and Euro bounced off its yearly lows and downward trend changed to upward one. I could go and on, but it is better that you do your own analysis and find what market conditions causes securities to move sharply. 

Respect market but do not be afraid of it

Respect and fear are the opposites and they produce absolutely different results in trading. Fear blinds you and takes away your ability to make intelligent decisions. Respecting market enables you to always be on alert and protective, but also in the attacking mode when opportunities arise. Although you know that in this game you can never relax you can never base your decisions on fear. If you are afraid to execute trades when your system gives you a signal you will never be successful. Optimism and faith in what you do is an absolute must in any activity, especially in trading. Nobody pays you a stable salary here. Everything you make in the markets you do it by taking risks. You have to be fearless in following your system. It does not mean careless. No, fearless! 

Use opportunities to the fullest when you are right and cut losses when you are wrong

When you are patient and finally opportunities do come you have to take full advantage of them. Take much bigger positions then, than you usually do in average opportunities. It maybe a trade that fulfills all possible requirements with both technical and fundamental data in place or some other criteria that you follow. When the best opportunities arise you can increase your account by fifty or even one hundred percent if you use those situations to the fullest. It often happens when some tendency becomes clear. I have already mentioned a few of those. When markets go sideways it is very difficult to make money. Therefore, you should not risk much in those kind of situations. However, when you see a clear tendency developing take advantage of that and take a bigger position. What happens if you find out that you were wrong? You have your insurance � stop loss orders. That�s what you should always have. When you see that you are wrong cut your losses and get out of the market. If you are able to fully use one or two of those best opportunities per year you will be a very, very, very successful trader. 

Have an open mind

Markets change. Some strategies that used to work no longer do now. However, people remain the same and they are still controlled by their emotions of fear and greed in trading. Breakouts may not be working as well as they used to, but they are other ways and strategies that you can apply and be very successful. Be ready to change something that used to work, but no longer works. Learn, change, adapt! Always ask why happens what happens. Search for reasons behind any move. In this way you will develop your unique approach towards markets. And this will enable you to make consistent money trading. 

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

See also:

How to make money trading breakouts

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

10 top day trading rules

Day trading is probably one of the riskiest ways to trade financial markets. As trades are opened each day the entire trading capital can be lost in a week or even a few days (if one decides to risk a lot). You will find some good traders among those who are in the echelon of the most successful, but they are the minority. Most are swing or trend traders. However, successful day tradingis possible and if you feel it fits your personality best I would concentrate on that type of trading and would not bother myself with other types of strategies. One of the keys to success in day trading (like in any other) is a set of rules that you will have to follow �religiously� and with very strict discipline. Improvisation is a road to ruin in trading. Only the best of the best can afford doing that. And they do burn doing that quite often. So, let us try to set some of those rules in the article. 

Entry level, profit target and stop loss

Do it �religiously�. Never start a trade before setting these things in order. Decide where you want to enter, where to exit and if the trade goes wrong what your loss will be. Setting these three things before you actually enter a trade is is one of the keys for you to become a disciplined and finally successful trader. It will help you to make a plan and follow the plan and avoid spontaneous decisions. 

Do not overtrade

 

Day trade, but do not overtrade. This is the most usual �trader�s disease� that all newbies have. They believe that markets offer enormous profits daily. Theoretically they do. But hardly anybody can materialize all of those �theoretical possibilities�. What you will end up by trying to do this is losing big picture of the market and eventually most of your capital. If you really want to be a good trader start from selecting one best possible trade (after serious analysis) a day.

Enter proactive not reactive trades

Action should follow from your plan, not from what you see happening. This can come with time too, but for the time being learn to plan your trades. Reactive trades can be very costly. Even today I lose some of my profits if I decide to trade reactively. I remember a few situations when I would have five or six consecutive losses. Those would often happen after a nice trend or swing and I would lose around 30-50, sometimes even more of the profits I made during the move. This happens less often now. I learned something! Praise God!

Do not risk more than two percent of your equity on any given trade

You can even start from 1 percent. It will take you a lot of time to lose your money. By the time it may happen you may have learned a lot and save your capital for the best trades. It would take you ten bad trades to wipe out your account if you choose to risk ten percent of your capital on a single trade. This can happen in a week. Or even faster! If you risk just one percent and do not trade often, but choose your trades you can survive a year (if you are a bad trader). Not all of your trades will be bad. Not all of them will be good. Just be sure you do your homework to pick the best ones. 

Record your progress and details about your trades

 

There is no surprise that a lot of good traders record their progress by writing a journal. They cover these things: reason behind the trade they took, possible target, maximum risk, rationale why they lost or won, what could have been done better. They might mention emotions that they had (fear, greed, joy, exhilaration). This always reminds them of what they should and shouldn�t do. Try doing the same and see if your trading results improve or not. I bet they will. 

Analyze first, then trade

A lot of traders just do the opposite. They get into market and then start thinking why they got there. Reverse the process. Spend 90 percent of your time analyzing and 10 percent of your time trading. At some point it may become 99 percent of your time analyzing and only 1 percent of your time trading. Wait for the best situations when 9 of 10 points indicate a very good trade which you should take.

Imagine A, B, C and all other possible scenarios before you enter a trade

Markets can go up, down or sideways. However, you need much more than this in order to be a profitable trader. You need to make predictions on where it is going to go and how far (up and about 500 pips till next resistance). This would help you to plan your trades when your predictions are right and get out of your trades the moment you see they are not right. You have to make an optimal decision regarding your entry level, take profit area and stop loss. If you excel in this you will be a top day trader sooner rather than later.  

Do not follow tips, trust your analysis

It is better be wrong but follow your judgment rather than follow somebody else�s tips and win. Why? You need continuity in your trades. You want to be successful. If you want somebody else to think on your behalf it is better to give money to some fund manager and let him do the job from A to Z. If you want to be a good day trader you have to develop your own understanding of market and trust your analysis and judgment. If you are wrong be fast to change your opinion about the state of the market. 

Think in terms how much you can lose, not how much you can win

I learnt this from Paul Tudor Jones. He thinks like that. This enables him to limit his losses and increase his profits. The same works for me. Thinking about possible profits can inspire you to make unjustified risks. Do not do that. You can always come back to the trade if you have enough capital. You may not have it if you take too much risk (let�s say 50 percent of your equity). Money is your tool and if you lose the tool you will not be able to make money. Save it for best time always having in mind that if you are wrong you can lose a lot. You do not have to live in fear, but be protective in your trades. 

Do not be afraid of losses, beware of your successes

Nothing teaches best than mistakes your make (provided they do not destroy your account). And nothing is as dangerous as successes are. Mistakes make you aware of your weaknesses and cause you to take protective trades (with manageable risk) while successes tend to make us arrogant and even lose common sense in trading. Very successful traders lost millions, even billions of their profits (sometimes everything), because they lost sense of reality and their weaknesses and started breaking their trading rules. It is better to have a lower opinion of oneself than too much confidence. Learn to be defensive before you become offensive. Learn to protect your capital before you learn how to increase it. Enthusiasm and other positive or negative emotions are not your friends in trading, but rather enemies. 



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Final thoughts

Profitable day trading is possible but it requires strict rules that a day trader would follow without any exceptions till he is able to feel market rhythm by means of long practice and hard learning. It may take a lot of time and even when you develop your own judgment for markets you will have to follow your trading rules strictly. Learn discipline, because a successful trader will always be a disciplined one. Good luck in trading.

If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

See also:

Day trading strategies and rules for dummies

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.