4 essential trading tips – How to trade successfully

The Old American Stock Exchange Trading Floor; ca. 1980's | Flickr

Tip 1: The right attitude towards trading

Investing and trading as a fast track to wealth?
If you want to start trading in stocks or options, you should first ask yourself the simple question why you actually want to trade on the stock exchange. For example, trading also attracts many people who (consciously or unconsciously) are looking for a daily dose of adrenaline or fast money. People who are looking for quick profits, excitement and adrenaline tend to make risky and highly speculative stock market trades. Of course this is not target-oriented on the stock exchange, but sooner or later leads to horrendous losses. You might as well go to an amusement park and get on a roller coaster for a few bucks or go straight to a casino.

If, on the other hand, you see trading and investing as a great challenge that you are willing to invest a lot of time and energy to master, then you could be on the right track. If you are also self-critical and learn from your mistakes, then you have the right basic attitude to take the step to the stock market. An absolute stock market debacle is then at least quite unlikely. Whether you make profits and maybe even beat the NASDAQ depends solely on your approach and your ability to learn.

Tip 2: Find your personal investment or trading style

What kind of personality do you have? A crucial question for every investor.
It is possible that you have suffered losses so far, although you have the potential to be a successful trader or investor. This could also be due to the fact that your investment strategy does not match your personality.

There are countless of good investors around the world and each of them has a different investment style. Warren Buffett, for example, is a different type of investor than Jim Rogers – and yet both are extremely successful. You can’t sit in front of the screen all day long and follow prices, news and charts? Then you shouldn’t pursue a day trading strategy, i.e. taking positions that require you to monitor the stock market daily. On the other hand, if you are constantly afraid that you might lose a high profit again, you should not enter into a long-term trend following strategy. And if you are very excited once you have clicked the buy or sell button, it is better not to carry out your transactions yourself, but to choose a strategy that is implemented by an automatic trading software.

There are many more examples, but what is important is this: Analyse your strengths and weaknesses and then choose the investment strategy that best suits you. Work on your weaknesses and use your strengths.

Tip 3: Pursue only one strategy and optimize it

What is your strategy? What advantage do you use to be successful on the stock market?

Can you already answer these questions without reading the following text?

If you cannot answer this quickly and clearly, it is very likely that you will achieve a rather moderate to average return. Really good investors follow only one strategy, which they perfect and then apply it flawlessly, patiently and with discipline.

Warren Buffett, for example, has become successful by strictly following Ben Graham’s rules for fundamental investing. However, there are also many successful traders who rely solely on a certain chart pattern or technical indicator to beat the stock market. One example could be buying a stock that breaks out to a new all-time high with large trading volumes. There are also traders who work with an automated system, Elliot Wave Trader, High Frequency Trader, etc. The bottom line: Every successful trader has his own tricks.

In order not to be swallowed up by the stock market, it is essential to have at least one working strategy or method. Because one thing is for sure: You can be lucky for a while, because as we all know, the tide lifts all boats. However, as there are inevitably turbulent phases, crashes and bear markets on the stock exchange, trading without a strategy almost certainly results in a major debacle.

Tip 4: With money management and risk management to stock market success

Money management and the control of your risks are the two most important instruments to achieve sustainable success on the stock market instead of stumbling from one disaster to the next.

A study has proven that 90% (!) of a fund manager’s performance is determined by money management and risk control. With good money management, you can achieve very positive results even with an average stock selection. On the other hand, you can go swimming with the best stocks, for example if you choose your position sizes too large or if you do not limit losses.

You must first determine what percentage of your assets you want to invest speculatively in shares or funds and how much capital should remain in a safer investment form. Depending on your personal risk tolerance, you can, for example, invest 10% to 20% of your assets on the stock market. For your assets invested on the stock exchange, there are then various methods of limiting your risk

Methods for risk minimization

Risk per trade
Never risk more than 1% to 2% of your total portfolio value per position (depending on your personal investment strategy and the time horizon, this rate may be slightly higher, but never more than 5%)

Limiting losses through consistent stop orders
Limit your losses! Closing loss positions in time is one of the most difficult things in stock market trading, but once you experience how many big price drops you can avoid, you will be happy to accept small losses.

Always use Stop Loss Orders and keep to them! It is a common phenomenon that investors postpone their stop as soon as the price comes close to it. Of course, this makes stop-loss orders completely pointless and you make a fool of yourself. Of course you should also not place a stop loss too close to the current price, otherwise you will be stopped out too often. Set the stop in such a way that you are not immediately stopped out even by a moderate countermovement. Search the chart for a suitable stop level that is not too obvious. This means that stops are well placed, for example, a good bit below round marks or technical support lines.

Fixed profit targets
Set a profit target in advance and actually close the position when that target is reached. For example, it is a good idea to use a so-called bracket order when opening a new position. Once the position has been established, a Stop Loss and Take Profit order (profit limit) will be transmitted directly. If the stop is triggered, the take-profit order is automatically deleted – and vice versa. This way you can enter a position with peace of mind and even go on vacation without having to constantly check the prices. Targets and risks are then defined, so that only the market decides the result.

Stop in profit on buy-in
Don’t let a handsome profit turn into a loss. Once your position has reached an appropriate profit level, you should increase the stop to your cost price. This way you are protected against a loss in this position in any case. Do not be too hasty, however, as a small reset can trigger your stop too early and the trade will be in vain. As a rule of thumb, two-thirds to three-quarters of the way to your profit target should have been covered before you set your stop at break even.

Variant: Trailing Stop
To have the stop adjusted automatically by the trading platform, you can use a trailing stop order: For example, if you have bought a share at $30, you can place a trailing stop order with a spread of $3 . The stop is then set at $27. If the stock rises to $32, the stop is automatically increased by $2, so it is now $29, and so on.

Trading pause in case of large losses
If you have lost a pre-defined percentage of your assets, for example 10% or 20%, then you should temporarily refrain from trading on the stock exchange and analyse exactly what led to these losses. Only when you can clearly identify your mistakes and correct them should you plan a new start.

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