To be a successful trader you need to get into the habit of getting paid by the market for your trade ideas, the risks you take, and the capital you commit.
All too often though traders end up doing exactly the opposite. That is they pay the market.
Let's make no bones about it, the market has enough money without adding your hard-earned pot to its hoard.
Of course, newbies and novice traders have to pay their dues. The best way to learn in trading is to experience the pain of a financial loss.
Losing is part of trading and it's one that we have to get used to, the trick is to limit the size and number of those losses.
And perhaps most importantly of all, traders need to learn from their mistakes, rather than blindly repeating them.
So how can traders ensure they get paid, rather than payout?
Traders can't guarantee that they get paid by the market if they could, then I wouldn’t be writing this article and you wouldn’t be reading it.
Making money in the markets sounds easy- all you need to do to get rich is to invest a penny and double it 30 times in a row.
If you do that you will have turned a penny into more than $5..0 million in a calendar month.
Sadly practical considerations, and, the laws of probability and complexity get in the way of this, in the real world.
However, it's a useful thought experiment and one that serves to show what is and isn’t possible or realistic.
What traders can do however is to slant the odds of success, in their favour
Do this regularly and you are a long way towards trading successfully and building up your capital.
Where and how do you start to do this?
Well, with first principles, that means setting out some ground rules about what you are going to trade when you are going to trade and the type of opportunities you will look out for.
That might mean trading liquid US equities, in the afternoon in Europe, and looking for breakouts and swing trades which have decent upside or downside potential, within the price action.
Even by creating a simple list like that, we have shrunk your trading universe from tens of thousands of possible instruments, to a few hundred.
We have focused on a time zone in the trading day and identified the type of opportunity you want to target within that trading universe.
In doing so you are already greatly boosting your chances of trading success.
So, what about finding trading opportunities?
Once you have specified the types of trading setups you want to trade, finding them becomes that much easier.
As you may be aware I like to systemise my workflow where I can and to do that I make use of indicators and data, for example, moving averages and relative strength.
Simply creating a watchlist of the stocks you are interested in means you can keep an eye on your trading universe.
But if you also add in some specific data points then we can begin to sort and filter that table.
So, for example, you might add a column into your watchlist for key Moving Averages say the 10, 20 and 50-day measures you can now compare where they are positioned, relative to the current prices of the individual stocks in the watchlist.
If we have the daily % change and the last price in our list, we can easily look at gainers and losers. At a glance, we can see if they are likely to move above or below any of the moving averages under observation.
If we add in a momentum-based indicator like Relative Strength, then we can quickly rank or sort the list, looking for overbought and oversold scenarios.
If we find an oversold stock whose share price has begun to pick up, and which is nearby, to say, its 20-day MA line, then that might well create an upside trading opportunity.
By searching and ranking the watchlist in this way we should be able to come up with a shortlist of say five to ten names that warrant further investigation.
Drilling down into the short-list and the charts of, and newsflow in, the stocks within it, should allow us to pick the best trading opportunities from it.
They may not be actionable right now but we can set alerts at key price points to highlight them as and when they are coming into play.
Of course, none of this will matter a jot if we aren’t sensible about our trade sizing, risk and reward ratios, money management and overall exposure. But if you can combine a systematic search for opportunities with a disciplined approach to trading and execution, then I believe that there is every chance that you will get paid by the market more often than not.
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