Foundations: Trading Effectively

Over the last few months, I have been taking a close look at each Foundations of Stocks and Options teaching. My primary goal has always been to present what I felt was the most essential aspect of each class session. Most of the classes focused on the nuts and bolts of trading, such as candlesticks, stock charts, and indicators, but there is more to trading than what a stock chart will display on your computer screen.

There are external and internal forces each trader must face as they navigate the world of trading. The external forces which cause the market to fluctuate are such factors as the news cycle, company earnings reports, and the law of supply and demand. These are forces that are beyond a trader’s control, and we must learn to traverse them accordingly by adopting such tactics as setting trade entries, setting trade targets, and setting stops. Ultimately, we can do little to adjust or influence these forces directly, but we can learn to mitigate ​their effect on our trades.

Secondly, there are internal forces that are entirely in our control but are still major challenges and roadblocks for the individual traders. Internal struggles such as letting our personal bias infiltrate our technical analysis or linking our success to the size of a trade’s profit. However, just like learning to deal with external forces, we can do a few things that will balance the playing field when it comes to internal forces.

3 Ingredients for Effective Trading

When it comes to facing the various internal forces which a trader is up against, there are three very distinct ingredients or elements that a trader can put in place to help alleviate the effect of internal roadblocks: correct analysis, appropriate planning, and accurate execution. One of the best methods of determining if your stock analysis is on target or not is by tracking your win-loss ratio on your trades. Our benchmark around Tradesmart is to be correct in our analysis around seventy percent (70%) of the time. As for the quality of planning, using a Return on Investment ratio or ROI is one of the best ways to track if you trade planning is on target. Finally, strict adherence to your trading plan is a marked result of your accurate execution for each trade.

​Action Steps

There are a few action steps you can put in place to help establish a firm foundation for trading. You should create a trading plan and solidify it by writing it down. Then test your analysis by practicing virtual and or back trading. If you virtual trade, you can do it in real-time with today’s market. I tend to do it this way as it keeps me from looking ahead when back trading.  Or you can go back in time and learn to trade from a stock’s historical data. Finally, journal all of your trades and closely track your metrics and results as it never hurts to write down your analysis and your entire trade forecast prior to execution.

In closing, it helps to establish a pattern of practice to develop your trading muscle. By taking a little time each day or each week to plan trades, setting up virtual trades, and following through with your trading plan, you will find trade by trade that practice does build a firm foundation upon which you can stand.

Thank you so much for reading, and as always, if you wish to learn more regarding this topic, please consider signing up for our Foundations of Stocks and Options class, which you can do here, and we look forward to seeing you in next week’s Foundations of Stocks and Options blog!