10 Trading Survival Techniques
Although all traders know that losses are inevitable, they want to minimize those losses and stay solvent to trade another day. Here are some techniques for surviving as a trader.
Build your trading tool chest
The proper tools help you evaluate your trading system and test your trading ideas. They enable you to keep trading logs to review your trading performance. You also can use tools to stay in touch with other traders and exchange ideas that ultimately may help you improve your trading skills and discover new trading opportunities.
Don’t scrimp on the tools you select for your trading activities.
Choose and use your favorite tools wisely
To avoid driving yourself crazy with the hundreds of options available, pick the top two or three trading tools that make sense to you and fit your trading style. Take your time getting to know how they work and how best to interpret the information they generate. Use them to build the types of charts that match your trading style and don’t worry about learning all the new gadgets.
Keep your eyes open for new tools that can improve your trading profits, but use caution before making changes to your winning trading system.
Use both technical and fundamental analyses
You may have heard that all traders use technical analysis and believe that fundamental analysis is a waste of time. Don’t believe it. Although technical analysis is crucial to finding the right entry and exit points, fundamental analysis improves your ability to make the right stock choices, given market and economic conditions.
Using a combination of fundamental and technical analyses, your chances of identifying bull and bear markets and finding phases of transition and consolidation improve dramatically. Your best trading opportunities are at the beginning of these phases of change, so be sure that you understand the six phases of the market and know which sectors offer you the best trading opportunities.
Count on the averages to make your moves
You may think that using data from averages to find the right time to enter or exit a position is counterintuitive, but moving averages can be powerful trading indicators. Moving averages actually smooth out the data for you visually and help you identify any trends.
Be sure to find out how to use moving averages and what they mean. After you understand them and what goes into them, you can manipulate moving averages to your advantage and to coincide with your trading style.
Develop and manage your trading system
To be able to trade outside the pack, you need to develop your own trading system, using your own favorite tools. Although you can use tools provided in off-the-shelf software packages, you want to develop and adapt a trading system that fits uniquely with your personality and trading objectives.
You’ll need to constantly monitor your system’s successes and failures and look for ways to make improvements.
Know your costs
Not only do you have to worry about commissions or transaction fees, but you also must watch for any slippage in your trades. Even though you may be using stop or limit orders, you rarely end up executing trades at the exact entry or exit prices you plan. Some slippage is bound to occur, so be sure that you carefully monitor your commission costs, transaction fees, and slippage costs.
In addition, don’t forget to consider the tax man. If you’re trading stocks that you hold for less than a year, any profits you make are taxed as current income instead of at lower capital-gains tax rates.
Traders must also avoid being caught by wash sale rules. Most trading losses can be used to offset trading gains and thus reduce your income tax burden, but if you sell a stock for a loss and repurchase the same stock within 30 days, your trading loss for that transaction can’t be deducted.
Have an exit strategy
Knowing when to take your profits and get out and when to accept your losses and close a position before it becomes even more damaging can be among the hardest lessons any trader must learn. All too often you’re enticed by the win and want to ride it to the absolute top.
Wise traders plan their exit points at the top and bottom of each position long before they ever enter that position. Getting caught up in the emotions of a winning trade is easy, but don’t forget you’re operating a business.
Watch for signals, don’t anticipate them
After you make a decision to buy a stock, you may find that you’re impatient to actually get into that position. You start watching the charts and waiting for the right signal to buy. Often, you’ll see charts move close to your planned signal but not actually reach it.
Wait for the signal you’ve designated in your plan. Don’t anticipate any moves, even if the stock price is getting close to that point on your charts. You may miss the perfect entry point, but you’ll be less likely to make that fatal mistake of entering a position before the signal is triggered only to see your stock reverse course and thus be forced to take a loss.
Buy on strength, sell on weakness
When you see a stock showing strength and heading into an uptrend, it’s time to buy. When you see a stock falling and showing signs of entering a weakening period, it’s time to sell. If a weak stock takes a turn for the better, you can always reenter the position.
Keep a trading journal and review it often
The only way you can ever improve your trading skills is by keeping track of what works and what doesn’t and trying to gauge why. After each trade, take the time to write down the details of the trade and what went right and/or wrong with that trade. You can only improve what you measure, so measure everything and put it in your trading journal.