8 Killer Steps that Make You a Successful Stock Trader!

Easy to Follow Steps that make you a successful trader

rading Stocks have become a fashion quotient for the millennials. Once people get the hang of a few extra dollars, they jump to trade financial instruments, mainly derivatives. With the explosion of social media channels, derivatives are promoted as a quick-rich scheme. While that may be true, such gains are inconsistent.

Many get into day-trading on the assumption that it is easy to make money. In reality, trading demands tremendous discipline, energy, and emotional balance. On top of it, some may go sleepless at night. Thus, trading is for experienced, financially savvy, highly disciplined people. Lack of discipline and knowledge renders many traders lose their hard-earned money. So, here are eight killer steps that every trader needs to stay on track and remain profitable.

How to Become a Successful Trader?

Trading is a skill that has to be practiced over time to become proficient. There are numerous trading strategies from which you may pick one and master it. A common reason for traders to fail is not sticking to the rules or having a game plan. Here are some which, if adhered to, shall prevent errors.

Step 1: Why Trading — The Objective to Trade stocks or forex:

Step 2: Strategy — The Game Plan

Step 3: Time in the Trade — Short term or long term

Step 4: Position sizing and Allocation

Step 5: Trade Entry

Step 6: Stop-loss

Step 7: Trade Exit

Step 8: Trade log

Let’s run through all the above steps with an example.

Step 1: Why Trading — The Objective to Trade stocks:

People trade stocks primarily to make some quick money (cash) or aim for cash flow. Day traders aim at a profit within a day, whereas position or trend traders aim at cash flow over a few weeks to months. The goal is to have consistent profits.

Step 2: Strategy — The Game Plan:

When it comes to trading, there are numerous strategies people employ aimed to profit from their positions. Some of the techniques are like, but not limited to:

  1. Support/ Resistance
  2. MACD cross over
  3. Moving Average cross over
  4. RSI
  5. Stochastic
  6. or the combinations of other technical indicators.

As an example, let’s take the MACD crossover strategy for demonstration.

Source: Tradingview

When the blue line (fast length) crosses over the red line (slow length), it is a bullish crossover that you can enter a position—the position to be exited when the opposite occurs.

In this case, the strategy is MACD crossover, and the game plan is to enter a position when the bullish crossover occurs and exit when a dead cross happens.

Let’s move on to the next step → time in the trade.

Step 3: Time in the Trade — Short term or long term:

Before entering any trade, one must know and understand the time they will exist in any trade. Here are some typical numbers worth knowing:

Day Trading → few hours

Swing Trading → Few days to weeks

Position Trading → Few weeks to months

Investing → Months to Years

In the MACD crossover strategy, we executed a position trade that lasted a couple of months.

Step 4: Position sizing and Allocation:

This step is the most important one when it comes to risk management. Not all trades result in profits, and thus, it is essential to limit the position size and allocate the capital as needed.

Let’s assume we have $10,000 to trade stocks. Position sizing has to be in a sweet spot that it should neither be too high (as it would increase the risk) nor too low (as resulting profits would be too small to celebrate). For a $10,000 portfolio, it is ideal to have 5 to 10 positions.

$10,000 / 10 positions = $1000 per position (Stock/ETF) → that’s about 10%.

Ideally, it is not recommended to have a fixed %, and it all depends on total portfolio value.

For a $100K portfolio, → the position sizing shall be about 5% or $5000 per Stock/ETF. In such a case, one may hold about 20 trade positions in their portfolio.

Step 5: Trade Entry

Before positioning a trade, one should not anticipate or assume but wait patiently for indicators or candles to confirm the direction. Once the confirmation is witnessed, a position is entered, and continuous monitoring must be done until exit.

We wait for confirmation on the bullish crossover in MACD strategy and then position the trade in the example stated.

Step 6: Stop Loss

The next step after positioning your trade is to set a stop loss. Trading, as such, is a kind of probability. All a trader does is be on the side of higher likelihood so that the trade becomes profitable.

The higher the probability (more signs of trade confirmation) in a trade, the more the chances of being profitable. However, it is essential to limit the losses, which is nothing but a ‘stop loss’ or a ‘trailing stop loss.’ Different strategies have their method to attach a stop loss. In the trades as discussed in the example, I used a 10% stop-loss; meaning on a $1000 position trade, a 10% stop loss means we agree to a risk of losing $100 on the trade for a position worth $1000.

Here is another interesting article on an ATR indicator and how Ben the Trader uses it for position sizing and setting a stop loss.

One can get more creative on stop-loss and adopt a suited method based on the risk appetite and experience.

Step 7: Trade Exit:

The next step is exiting the trade, the most crucial step. Most traders fail to exit a position and continue to hold the position anticipating more profits. Thus, it is essential to exit the position once the signal is confirmed, a MACD dead cross.

Step 8: Trade Log:

Traders have to maintain a log of all positions to review and learn from the mistakes done. Thus, traders have to keep a record that captures everything related to the trade. That can be a simple excel or google sheet where strike price, position size, date, strategy, stop loss, exit, and profit/loss calculation.

I hope this article was helpful, and feel free to access My soccer portfolio.

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This article is not a buy/sell recommendation and shared for information & knowledge only. The author is not a professional (or) qualified investor, and the articles are not investment advice or a recommendation or advice of any sort. All the analysis/data are from the public domain, like, but not limited to, Yahoo Finance, Google Finance, Investing.com. Consult your financial planner for any investing decisions. This article is not a paid promotion, and the expression in this article is solely the author’s research & analysis. While anyone can give a stock “BUY” recommendation, investors must have a strategy in place and know when to “SELL” a position.

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