I have been actively trading the market for about 25 years and plan on trading as long as I can operate a mouse and a keyboard. I am thankful every day that when I went totally deaf forced to give up my career as a lawyer, and discovered trading.
Over the years, I have probably written more than 25,000 articles for Real Money. Many stocks, themes, and strategies have been discussed. However, no matter how much experience you have, good traders never stop learning. Quite often, we have to learn the same lessons over and over, yet we will still make the same mistakes. It is important to constantly remind ourselves of key principles.
There are the 10 principles that I continue to constantly relearn. Here are the first five. Next week I will discuss the next five.
1. Predictions and Forecasts Are a Waste of Time
Over the years, I've heard an uncountable number of predictions and forecasts. The vast majority have been wrong or so poorly timed as to be useless. Wall Street loves predictions and forecasts because that is basically what they sell. Brokers and advisors convince customers that they can predict the future better than they can and therefore, you should trust them with your money.
The reality is that it isn't predictions and forecasts that produce good returns. It is the strategy, reactions, and the ways you deal with the inevitable good and bad luck that will determine your success. What the future holds is unknown, but if we are prepared for surprises, we can find ways to profit.
Go ahead and make predictions and forecasts but be prepared to be gloriously wrong. Be ready for volatility and things you never imagined. It is reacting decisively with a clear strategy that works far better than predictions and forecasts.
2. Focus on Picking Stocks
A huge amount of time, money, and energy is spent talking about 'the market' and what it might do. It feels like it is the right thing to do but ultimately, what will make you the biggest profits is picking the right stocks at the right time. The fact that the DJIA or S&P 500 is overbought or due for a rally is great intellectual fodder and gives the folks in the media and market pundits something to do, but it doesn't do a very good job of producing gains.
The big gains in the market come from finding the right stocks and then employing a strategy for managing them as they develop. You only need a few really great stocks to produce exceptional gains. They aren't easy to find, and you will have to deal with many losers and mistakes along the way but keep hunting for the next great stock and don't be distracted by all the other issues that are out there.
3. Discipline
The biggest mistake that most investors and traders make is a lack of discipline. Inertia is our default position. We don't act when a stock is weak, and we don't take advantage when we are in the right stock.
In general, the greatest form of discipline in trading comes when you embrace the power of selling. Selling is the most powerful tool that we possess, but many are afraid to use it. Selling is nothing more than a form of insurance and can be undone in the blink of an eye. It helps us control our emotions and gives us a feeling of power when it becomes part of our routine.
Stocks have to be managed carefully. Fundamental research will only protect you to a limited degree. Cutting losses aggressively is the foundation of great returns.
4. Use Charts
Charts are often dismissed as voodoo by the same people that are so confident of their ability to predict macroeconomic events, but they miss the main point. Charts are useful because they provide a framework for discipline. There are millions of ways to use charts, but at the heart of every method is cutting losses and letting profits run.
Charts are your best tool for developing a trading methodology that will allow you to implement the main points I'm making here. Charts help you see visually the emotion and psychology that exists in the overall market as well as in individual stocks.
Don't think of charts as predictive devices. Think of them as a map that will help you develop a strategy for the battle that lies ahead.
5. Be Aggressive
George Soros is quoted as saying something along the lines of 'It isn't whether you are right or wrong, it is how much money you make when you are right and how much you lose when you are wrong.'
This is what I work on in my trading more than anything else. To really produce great gains, it is necessary to be aggressive at buying when the time is right and aggressive at selling when something isn't working.
It is a cliché but cutting losses quickly and letting winners run is the heart and soul of great trading. The more aggressive you are at doing that then, the better your results.
Next week, I will discuss another five key principles that will help make you an exceptional trader. It is important to constantly remind yourself of these concepts and to refocus your efforts regularly.
