Achieving consistent profitability in trading is a combination of thorough market analysis, disciplined execution, resilient psychology and experience. The more you learn from your past trades and other fellow traders, the more skilled you become. But no matter the style and strategy, there are timeless trading principles that all traders adhere to.
Here are some of them....
The Market moves in cycles
The market generally cycles around four major phases. How fast it transitions from one phase to another will heavily depend on current global and local economic conditions.
Trade strategies are adjusted depending on what cycle and trend the market is.
1. Accumulation
Stance: Buy in tranches
Period of consolidation with stable volatility. Institutional accumulation begins during this phase.
2. Mark-up
Stance: Add to position and hold
Period of bullish market sentiment. Economic performance is strong thus prompting increased appetite for risk. Institutional buying spikes as a result.
3. Distribution
Stance: Sell in tranches
Period of profit taking. When growth targets are reached and no strong catalysts are in sight, institutional investors start to look for more profitable markets.
4. Capitulation
Stance: Remain on sidelines
Panic selling phase. Exodus of institutional investors cause big sell offs that lead to market breakdown. What triggers institutional selling differs each time.
Trade within the direction of the trend
One of the major assumptions in Technical Analysis is to ride the trend until it bends. Like a sailor using the wind to sail the seas, a trader must use the current trend as the basis for sound decision making.
The trend dictates what trade strategy is applicable. It also tells you whether the market is dominated by sellers or by buyers.
Uptrend: Buyers are in control. Go long and add on pullbacks.
Downtrend: Sellers are in control. Trade the bounce and stay light.
Sideways: Equilibrium. Trade the range as long as support levels hold.
trade allocation depends on current market condition
Go heavy on bull markets
When the market is strong and aggressive buying is taking place, allocating more than 70% of your total fund is recommended.
Stay light on bear markets
When market is weak and panic selling ensues, reduce allocation to less than 50% of the total fund or remain in a full cash position.
Let the market lead the way
No one can predict short term market movements. As such, the best move of any trader is to WAIT for the market to create a clear pattern or trend before responding with the appropriate trade strategy. If you are undecided, then do not buy. Indecision is the culprit of most trading mistakes.
When the ideal patterns in the chart emerge and your criteria are checked, then you'll trade with confidence and make quick decisions. Let the market show you the way and simply respond.
Fundamental Value drives Long Term Growth
Any asset, market or company that is poised for steady long term growth will always show strong year on year earnings and aggressive expansion. As fundamental value grows, it will attract more institutional buying over time which results to price appreciation. Never invest long term on speculative assets!
Risk Management is Key to Consistent Profitability
Small losses, small wins, big wins. These are the only expected outcomes any trader should aim for. Never let a big loss happen. It can take many years to build a big fund but it will only take 1 bad trade to lose all of it.
Remember that losses CANNOT be avoided in trading. It is part of the game. What profitable traders do is they manage losses by mitigating it to a minimum amount ( usually -3 to -5%). This way, the wins heavily offset the small losses over time.
NEVER BUY A stock JUST BECAUSE IT IS CHEAP
Remember that what is cheap can be cheaper and what is expensive can be more expensive. Cheap stocks can remain cheap for extended periods of time. Avoid the cheap trap by focusing on stocks that have high growth potential and strong institutional demand.
The Market Never Runs Out of Opportunities
The market will always provide endless trade opportunities moving forward. If you missed a good trade then always remember that there is another one that will come again. Understanding this will allow a trader to realize that every opportunity is just a matter of thorough market analysis, patience, discipline and proper timing.
The best teacher is your past trades
There is a wealth of information in your past trades. It will directly show you what works and what does not. It shows you if your current strategy is earning you profit or is bleeding you dry.
When a trader consistently analyzes past trades, he learns both from previous wins and losses. It will become clear what strategy must be cultivated and what mistakes should be avoided. When continuous improvements are made based on trade performance, explosive progress happens. No other teacher will be as generous and straightforward as experience itself.
There are no shortcuts!
Success in any endeavor involves hard work, careful planning, discipline, patience and consistency. This applies to stock trading as well. How profitable you become in the market is largely based on your skill. The more work and thought you put into it, the luckier you become.
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