5 Steps to Build Good Trading Habits

Home

Main Menu

Written by David Hanson

Wednesday, 09 April 2008 11:55

Beginners trading the financial markets may not be aware of the bad habits that they form when they trade. The lack of knowledge in proper trading and the lack of discipline to follow a plan can lead to the formation of bad habits that are often times difficult or impossible to correct. Mistakes will lead to more mistakes that would eventually dry up the living blood out of the portfolio and in turn suck out every desire of a beginner to continue trading.

This was the exact situation I was in until I decided to quit my bad habits and instead apply a solid set of trading principles. This epiphany has led me to broaden my development of a good trading plan with the holy grail of sticking to it to maximize gains and if possible, lessen or avert losses.

There are, however, a lot of things to consider when executing one's trading plan. Executing one's plan on a stock for instance, is subject to be influenced by numerous external factors that may affect the trade from the time the entry was made up to the point an exit will be done. It can be the prevailing general market condition or at times the fundamental news that one collates and digests that influences one's decision to cut loss or take profit quickly for example. Sometimes, it can also be the rumors surrounding the stock that may influence one to buy it.

To serve as a guide, I have placed a set of procedures that I strictly follow to serve as a supplement to my trading plan. Here is what I consider as 5 Good Habits that every trader should possess:

1. CHECK the indices or the averages to know the general sentiment of the market. If the market is bullish, then bullish stocks can give more assurances of profits. Using the same logic, it also follows that if the sentiment is bearish, then it is wiser to short bearish stocks. This is a golden rule to observe when one employs a trend following system.

2. APPLY strict standards and be discriminating when selecting issues. Besides following the general trend of the market, one should have to set standards as to what issue/s to trade. Before you trade a stock, always question first why it is even worth trading in the first place.

3. CREATE a trading plan. The best thing about looking at the charts is that one gets to know when to buy or sell. Set the figures straight first before making a move. Before you enter a trade, always ask yourself first if you already have a plan to exit.

4. EXECUTE the trading plan with discipline. This means that stops should be observed at all times and that profit targets need to be met. It is very hard at the start to execute a cut loss as the fear of losing money creeps in. On the other hand, traders are sometimes unable to sell when the targeted profit has been reached because greed starts to dominate as traders hope to achieve much larger profits. Discipline must be applied to remove fear and greed as there are a lot of occasions that a losing stock will lose more and that a winning stock can quickly turn into a losing one.

5. FILTER the noise that can influence trades. Noise comes in a variety of forms and it affects one's judgment. It leads to confusion. Noise can be in the form of fundamental news, rumors, personal issues/problems, and sometimes the influence of co-traders. Be aware all the time of your emotional state before making a trade.

Equipping oneself with these five key steps can greatly help smoothen the rocky waters of trading and form a solid trading habit.

ZigTraders.com: Investment Advice - Fund Management