Identify what you are good at quickly – In general I like to trade stocks in the $1-$500 range however I also will trade lower price penny stocks. Occasionally I trade futures and options, but I generally avoid bonds, bitcoins, binaries options or currencies. Most of the people who have made big money in this business stuck to a small group of asset classes.
Always look for trades with a good risk reward ratio – If I am willing to lose $1,000 I should be profiting $2,000+ on a trade. This is much higher then it seems because most trade setups will not allow for a 2:1 or greater risk reward ration. For example I buy 500 Shares of XYZ @ $23. I get out a 22$ at $1,000 loss but I will only take profits at $25+. Of course you have to analyze the volatility of the stock because you don’t want to get stopped out and find out you are right later on.
Don’t let the past haunt you – One time I shorted $100,000 of a stock at $20.00 and it went as low as $5.00, resulting in and unrealized profit of $100,000. Unfortunately I didn’t have much of a plan at the time and I ended up only earning a $5,000 profit due to greed. Yes $5000 is still good money but it’s very painful to watch a $95,000 profit slip away. Of course it would be a lot worse if I had let this $100,000 turn into a loss, but fortunately I had already experienced that sort of situation and had at least learned to control some of my emotions, just not greed. Getting emotional about money is the reason most people lose all their money and give up before they ever have a chance to get consistently profitable.
Don’t trade illiquid stocks, especially illiquid penny stocks – If you think the road to riches in trading lies in “low volatility, minimal drawdown, risk adjusted returns” you are wrong my friend. You need to leave that to large funds trying to please investors since they have millions or billions and can survive with 7% returns. Unfortunately traders with less than $500,000 can’t live on 20% a year.
When you’re wrong you’re wrong – Admit when you are wrong, don’t throw good money at a bad trade, cut your losses quickly enough before it stings. Bad trades on your portfolio affect your objectivity and judgment.
This is a game of risk and odds – At the end of the day it’s all about analyzing the odds, risk management and emotional management. There isn’t much else to it, whether you trade fundamentals, technical’s or both it is still about odds and risk.
BEWARE OF HIDDEN RISK BECAUSE IT WILL RUIN YOU – Always account for hidden risk, just because something stays within a certain range and is in an uptrend doesn’t mean it won’t drop 40% the next 2 minutes. Just look at the EUR/CHF chart. It dropped something like 30% in 5 minutes. Just imagine being 10x leveraged on the wrong side – which isn’t unheard of in even institutional traders.
Don’t let anyone else dissuade you, if you think you are more likely make big money trading than building a business try it, unlike starting a business you will find out quickly if you have what it takes.
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