How to make money trading

How to make money trading? I guess all of us who got fascinated by the fact that one can live trading securities asked ourselves and others the question. It sometimes seems that making profits in financial markets has become a phenomenon of ‘Loch Ness monster’ – everybody has heard about it, but who has really seen it. In the same fashion you have heard that it is possible to make money trading, but have not heard who has done it. There are quite a few people who live on the money they make trading stocks, futures and Forex. Read the series of ‘Market Wizards’ by Jack Schwager to learn about the people and how they did it. Although, I have had mixed results in my trading career I can say that I have made more than I lost trading Forex. In the post I want to share with you some key elements that you should deal with before you can become profitable. Let me start.

Have an edge

What does that mean? You should notice some tendencies in the market you trade that happen regularly and they help you to make more money than to lose. There are some tendencies that happen from time to time and you can sometimes make money trading them, but in the long run you will lose more. Take time to find and test those ones that give you more profits than losses. Then form strict rules for trading them and start to trade. An edge can be trading multi months range breakouts, or trading chart patterns or simply selling at resistance and buying at support. It is important though that you test the tendency that seems to be working and see if it works long term.

Have your own investing philosophy

Various investors see markets from different angles and they are still able to make money having different perspectives on what moves this or that specific financial market. You might be long term, short term investor or even day trader with a unique approach towards markets and be very successful. What type of investor you are going to be depends on your personality, needs, risk tolerance and available capital. The more risk averse you are the longer your time frames for investing will be. If you are willing to take significant risks you will probably be a short term trader (even a day trader).

Have a plan and follow it

By having a plan I mean knowing what triggers a tradable situation, entry levels (and ways to implement it), trade size, stop loss and take profit orders. Having no plan means you do not know or understand what you are doing. When you sit down to look at your charts or analyze securities searching for possible trading opportunities you have to know what you are looking for. Is it a breakout, bounce off support or resistance level, touch of a moving average, overbought/oversold situation or market’s reaction to some fundamental news. You have to know what you do in each situation: trade, wait or do nothing at all.

Wait for the best opportunities

A lot of traders lose money, because they trade too much by taking average opportunities that’s why they have too many bad or average trades. Waiting for those excellent opportunities provides you with an edge against the crowd. You should learn to skip mediocre trades till you start noticing the best ones. Impatience is one of the top enemies that a trader may have. It causes him to overtrade and miss golden opportunities. When those do finally come most trades are short of capital and cannot take advantage of them. You have to ask yourself whether you are in this business for thrilling emotions or for making money. If it is thrills you are after then better go to casinos. If it is money you are after learn to be patient and analytic while searching for patterns that do work.

Understand what moves securities you are trading

Why does a stock go up dramatically or plunges down? Why does Euro rise against US dollar or falls? What causes gold to rise sharply and then collapse? Some of these are fundamental questions and you can find clear answers to them. In case of stocks most probable cause would be earnings, in case of currencies it would be monetary policies of Central banks, in case of gold it would probably be inflation. These could be main ones, but not the only ones. In each situation you will have to dig to find the underlying conditions pushing this or that market up or down. If you look at a recent collapse in Google stock (18^th of October, 2012) you will find out that it was caused by worse than expected earnings. The stock plunged around 80 bucks in 10 minutes. In the same fashion ECB president Mario Draghi announced that he was going to do whatever it takes to save Euro (on the 25^th of July, 2012) and Euro bounced off its yearly lows and downward trend changed to upward one. I could go and on, but it is better that you do your own analysis and find what market conditions causes securities to move sharply.

 

 

Respect market but do not be afraid of it

Respect and fear are the opposites and they produce absolutely different results in trading. Fear blinds you and takes away your ability to make intelligent decisions. Respecting market enables you to always be on alert and protective, but also in the attacking mode when opportunities arise. Although you know that in this game you can never relax you can never base your decisions on fear. If you are afraid to execute trades when your system gives you a signal you will never be successful. Optimism and faith in what you do is an absolute must in any activity, especially in trading. Nobody pays you a stable salary here. Everything you make in the markets you do it by taking risks. You have to be fearless in following your system. It does not mean careless. No, fearless!

Use opportunities to the fullest when you are right and cut losses when you are wrong

When you are patient and finally opportunities do come you have to take full advantage of them. Take much bigger positions then, than you usually do in average opportunities. It maybe a trade that fulfills all possible requirements with both technical and fundamental data in place or some other criteria that you follow. When the best opportunities arise you can increase your account by fifty or even one hundred percent if you use those situations to the fullest. It often happens when some tendency becomes clear. I have already mentioned a few of those. When markets go sideways it is very difficult to make money. Therefore, you should not risk much in those kind of situations. However, when you see a clear tendency developing take advantage of that and take a bigger position. What happens if you find out that you were wrong? You have your insurance – stop loss orders. That’s what you should always have. When you see that you are wrong cut your losses and get out of the market. If you are able to fully use one or two of those best opportunities per year you will be a very, very, very successful trader.

Have an open mind

Markets change. Some strategies that used to work no longer do now. However, people remain the same and they are still controlled by their emotions of fear and greed in trading. Breakouts may not be working as well as they used to, but they are other ways and strategies that you can apply and be very successful. Be ready to change something that used to work, but no longer works. Learn, change, adapt! Always ask why happens what happens. Search for reasons behind any move. In this way you will develop your unique approach towards markets. And this will enable you to make consistent money trading.