Trading is an art that not everybody can master. Only a handful who have perfected it take away the major chunk of money that enters and exits the market.
All novice traders, irrespective of educational background, caste, creed, and ethnicity, make the same kind of mistakes when they first enter the stock markets. Hence, in the stock markets, history repeats itself.
As a fact, most traders enter the stock markets for the lure of big money. And, traditionally, they repeat the same mistakes.
As expert traders know the thought process of novice traders, earning money becomes easy for them and hard for an amateur trader.
Trading is a mind game, and to be an expert trader, you not only need to know about the technical and fundamental aspects of trading but also inculcate the character habits of successful traders.
Read this article to know the things that can transform you from an amateur trader to someone who can trade stocks like an expert trader.
Are You a Trader or an Investor?
First thing first, consider your investment horizon.
There are two types of people trading stocks – investors and traders.
An investor is one who identifies an opportunity in a stock, buys it when the price is relatively cheap and sells it when the price goes beyond a pre-defined level. The investor would typically hold on to a stock until it reaches the target price, which can take days, months, or even years.
A trader scorns at the idea of holding on to a stock for huge gains. A trader would typically enter the market in the morning and exit by the end of the trading day. Sometimes though, a trader holds on to a stock for more than a day.
Hence, before going through the other steps, as discussed in this article, decide whether you are a trader or an investor. The steps discussed here apply to both traders and investors, although certain points might seem more appealing to a trader.
13 Deadly Sins of an Amateur Trader
Before you discover the secrets to be a trading expert, learn about the mistakes novice traders make.
- Close profit-making trades early, before the real rally begins
- Let their losses run, hoping the price would eventually cross their buy price.
- Lack of patience to follow the price movement of a stock
- Do not have a pre-defined trading plan.
- Rely more on the news than analysis
- Lays more emphasis on past performance than future opportunities
- Often work with high leverage.
- Do not have a risk management strategy.
- Never uses stop-loss orders.
- Averages a stock when it comes down.
- Buy stocks when the price is low. While often it works, sometimes a stock may take years before reclaiming its lost glory, or might not ever cross that level.
- Do not diversify their investments
- Rarely do their homework properly
5 Character Traits of an Expert Trader
Now that you know the things you should avoid, it’s time to know the best practices of an expert trader.
1. Patience and Observational Skills
To make your mark in the market, you must have patience. Quite often, a stock price will lure you into getting on a trade. An expert trader rarely gets into a trade when everybody considers the price to be attractive.
Sometimes, the price of a stock would go up, only to come down again. While amateur traders would lap up the opportunity at the first instance, an expert trader would be quick to judge that it’s a trap.
Hence, to be an expert trader, you must have acute observational skills and the ability to wait until the right moment. If that means missing a few opportunities, let it be so. The market always rewards the patient trader.
Expert traders rely on either fundamental analysis or technical analysis, or sometimes both, to determine the kind of movement that is expected from a stock.
Fundamental analysis is the type of analysis traders do to find out the quality of a stock. To perform fundamental analysis of stock, you must have adequate knowledge of parameters like book value, price to book ratio, price-earnings ratio, industry price earnings, earnings per share, and financial track record, among other things.
Technical analysis often overlooks fundamental analysis and relies more on price movement. A technical analyst rarely looks at the fundamentals of a stock before entering or exiting a trade. As a technical analyst, you are most likely to believe in the theory of ‘history repeats itself’ and trust price and volume indicators more than anything else.
To become a trading expert, you should ideally understand the fundamentals first and technical later. As you attain mastery over the fundamentals, shift to technical analysis for increasing your profits.
The market is random, at least for an amateur trader. Without a time-tested strategy, you can never be a professional trader.
However, news-based stock price movements can be hard for even the best of traders. Hence, your trading strategy must be flexible rather than rigid.
As a trader, your first task is to test any strategy before executing it. Consider paper trading for at least a month for testing your skills and knowledge before putting in real money.
4. Risk Management
The stock market rewards the brave.
Despite testing your strategy on paper and having near-flawless trades throughout the testing period, there will be days when the market will not be in a mood to favor you. An expert trader always trusts stop-loss orders more than target orders.
In the markets, not losing money is more important than making handsome gains.
By having a risk-management plan ready, you can stay assured that your losses will never surpass your profits. Even before entering a trade, consider how much money you can afford to lose. To earn consistent profits, you must accept the fact that trading is a two-sided affair; on some days, you earn, while on other days, someone else does.
An expert trader would always keep a record of their trades. Maintaining a journal helps them to detect their mistakes and take steps to rectify the errors.
Keeping track of your day-to-day records is also important as it gives you an opportunity to celebrate your success by looking at past mistakes. It might come in handy if you wish to take on the role of a stock market guru in the future.
Trading is an addiction that has given birth to endless rags-to-riches stories and ruined lives. The side you deserve depends on your interest and the ability to learn and practice. Keep an eye on this space to upgrade your knowledge about trading and profit-making.