Thursday, January 31, 2013

How to become a successful trader

A client writes: “I have trouble cutting my losses when trading.  I took the stop off one of my positions because I thought it would bounce off the 200-day moving average and have owned it before on a long term hold.  Any advice you may have on being a successful trader would be greatly appreciated.”

The best advice I can give you on how to become a successful trader is to be disciplined.  That is, you should have a definite guideline for entering and exiting a trade.  The set-up for entering a trade could be a 2-day higher close above the rising 15-day moving average, for instance.  I would recommend entering trades where the stock has been showing relative strength versus the S&P 500 as well as the sector it trades in (presumably the gold/silver stocks).  

You also should ideally have a guideline for booking profits.  You might take profits incrementally, say every 4-5% move in the stock you take 30-50% profits in your position.  You also will want to raise the stop loss on your trade each time the stock advances, that way you won't get completely wiped out if the stock heads south.  You might use a short-term moving average as a stop loss guide (e.g. the 15-day or 30-day or even the 60-day moving average).  Or you could use a percentage rule, such as a 5%, 7% or 10% stop loss.  Using stops is an extremely important part of any trading plan and will minimize your losses in case your timing is off.

The important thing is that once you've made a trading commitment, stick to your discipline and don't try to use your own judgment by exiting the trade prematurely.  Take profits along the way and let your incrementally raised stop loss take you out of the trade.  With practice and discipline you can become a successful trader.  

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