Background – Trading is a twelve step process
I have listed below what I believe are the twelve simple steps to trading success. These twelve points all require thought, planning and a degree of trial and error that will ultimately lead to a plan that suits your budget and your psychology.
1. Global Rules – These are rules you need before entering the market. I.E. “I will not purchase an airline stock.”
2. The Set-up – What price action on a chart are you looking for? Get to recognize how a chart should look, long before you buy a stock.
3. Finding a Stock – How do you find “the right” stock? I use the ProTrader end-of-day software tool that has been part of ongoing development process since 1998. This software quickly scans all stocks on a particular exchange searching for stocks that are giving various buy signals.
4. Entry Signals – You must have a clear reason or “buy signal” on a stock before making an investment into any company. My buy signals are predominantly based on technical analysis, that is, studying the chart.
5. Confirmation Signals – My main confirmation signal is a computer indicator called on-balance-volume. OBV gives me a very good idea of whether the buyers or the sellers are in control of the stock.
6. Fine Tuning Your Entry – One of the great benefits of the internet has been the introduction of various trading platforms. These platforms give every investor access to market depth. Market depth can be the key to perfecting the timing of purchasing a stock.
7. Risk Management – Assess how much you need to risk on each trade. Risk management is critical to trading success. Most people who buy a stock are only focused on the potential profits, however the first thought needs to be “How much am I prepared to risk in an effort to see whether I am right?!”
8. Money Management – Never plunge and never over-diversify. If you are developing a portfolio you need to strike a balance between putting all your eggs in one basket and over-diversifying.
9. Order Placement – Be precise and get it right. Many a loss has been the result of poor order placement – buying instead of selling, incorrect volumes etc.
10. Manage the Trade – You need to manage the trade as each day progresses.
11. Exit the Trade – In today’s volatile markets you cannot sit and wait. You need to exit at some point.
12. Review each Trade – Did you follow your rules?