The journey to becoming a consistently profitable trader is often long and arduous. Unfortunately, there is really no set formula to pulling money out of the markets on a regular basis. Many newer traders may be shocked to hear this, but it is true. Many of the best traders in the world have stated similar sentiments when asked about their success. Simply put, there is no Holy Grail, and even the top people in the business still go through ups and downs.
The fact is that guys like Steve Cohen and Paul Tudor Jones, despite all of their wealth and success in the markets, are wrong at least as often as they are right when putting on a trade. In this business you are going to be wrong a lot. This fact, however, has very little bearing on success. Profitable traders have the discipline to both cut losses short, and to let their winners run. A couple of nice winning trades can wipe out a lot of small losses and this is why it is possible to trade profitably even with a winning percentage under 50 percent.
Given the fickle nature of the business and the inevitable down times when absolutely nothing works, it is important that traders create a framework which optimizes the variables they can control. While you cannot control whether a stock goes up or down while you are in a trade, you can control what stock you are trading and whether it is a good fit for your strategy and skill level. For many traders searching for success, the single most important factor to consider, aside from risk and money management, is what instruments to trade.
This is an open-ended question. There certainly aren’t any hard and fast answers. What is crucial, however, is that traders focus on an instrument that is suited to their trading style and personality. For example, ultra short-term scalpers will probably have the best luck in extremely liquid instruments where they can get in and out, with size, quickly and reliably. Therefore, these types of traders should tend to focus on very liquid stocks such as Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Apple (NASDAQ:AAPL), to name a few possibilities. The futures markets can also be fertile grounds for traders looking for deep liquidity. Popular contracts such as the e-mini and NYMEX crude certainly can provide opportunities for scalpers.
Other traders may hold positions a little longer and value volatility just as much as liquidity. In many cases, successful stock day traders will seek out situations where there is both volatility and deep liquidity. For traders that love serious volatility, the stock market might provide the most fertile hunting grounds as opposed to futures or foreign exchange. While a commodity rarely makes a 10 percent move in a day (although it does happen) this occurs in the stock market every day, usually several times. In order to find stocks that are both volatile and liquid, traders need to pay attention to the news. Earnings reports, management shake-ups, corporate announcements, analysts’ reports, and rumors can all make activity in a stock explode on an intra-day basis. For day traders, these types of situations frequently yield the best opportunities.
Other traders prefer to take a longer-term approach and may hold swing trades for weeks to months. Selecting the correct stocks or other instruments to trade using this strategy is also key. Swing traders may be most interested in finding securities that seem to follow longer-term technical analysis patterns. A good example of this are stocks or commodities that have a bullish long-term chart whereby powerful breakouts are preceded by periods of consolidation. Both Apple (AAPL) and gold have shown this pattern over recent years. Swing traders would have wanted to buy these securities as they were breaking out of consolidation or basing areas on heavy volume and hold on until the momentum petered out at higher levels.
Careful stock and instrument selection is also important for long-term investors. Consider, for example, the advantage that a very rigorous, research-focused investor may be able to gain in the small-cap marketplace. Many small-cap stocks have no institutional analyst coverage and very few money managers on Wall Street follow them. In many cases, these under-followed, un-sexy stocks are mispriced by the market. Talented and diligent investors can create a market-beating niche for themselves if they are willing to roll up their sleeves and dig for cheap small-cap stocks using fundamental analysis.
For every trader, there is a strategy that suits their skill-set and personality. Furthermore, for every strategy, there is a certain kind of stock, instrument, or asset class that will yield the best results. Success in the markets becomes exponentially more likely once you find the trading strategy that you are most comfortable with, the most effective instruments with which to implement that strategy, and then apply it with strong risk and money management rules.
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