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You want to trade but do not know what, when and how to open the position? You are not alone!
In article 5 Ways to end a bad trade I wrote about how to limit losses. I was also able to learn, with a lot of effort and pain (both financial and emotional), that the first step is to survive in the markets. Once you have done that, you almost only have to wait to win. But what does a perfect winning trade actually look like?
I have tried just about everything that the stock market has to offer: Charts, news, fundamentals, trading systems, game theory, tricks, supposedly secret information, etc.
Of course I fell down countless times, but I always got up again. I often thought: “Okay, what am I doing wrong?” And it was exactly this trying, fiddling and acting that turned out to be the decisive advantage for me in the end (unfortunately I only realized this much later, which was quite frustrating in the meantime).
That is why I am writing these extremely important lines to you today.
Here are my 5 ways to start a good or maybe even a perfect trade
1.leave the status of waiting and watching
I have heard many investors, seminar participants or customers whom I personally look after say over and over again: “I’ll wait for this and that to happen before I invest.” Also very popular are statements like “The analysts are in disagreement right now” or “The charts are not clear right now.” The phrase “I need to speak with my wife again.”
Whether you want to trade or invest: there’s no perfect time in the stock market. This applies both to entering a trade and to your own learning phase, which, the earlier you start, gives you more time to gain experience.
There is the famous 10,000 hours formula, according to which you have to perform an activity for 10,000 hours to become a master in it. There is no way around it in the long run, because your experience will later be your only and most valuable advantage over the market. In a study of fund managers, the Scope rating agency found that fund managers who had longer professional experience and had greater access to research (i.e. knowledge) achieved better results than inexperienced fund managers who had fewer analysts on their teams. (1)
I have noticed time and again (and have made this mistake countless times in the past) that investors often get bogged down. Every day new stories are invented on the stock market and when investors are dissatisfied with their current strategy or an investment is not going well, the temptation is great to change course and jump on a new story.
My tip: Choose a strategy that suits your skills and personal goals. How to find this out, I have written a guide in the article A strategy that creates success and enthusiasm for you. Concentrate all your energy like a laser beam on this point and you will force the success if you hold out long enough.
3.not trusting your own perspective
I’ve said quite a few words about why forecasts and signals cannot be trusted without reservation. The problem is that our view of a chart or the stock market is always only a subjective section, one could also say our own invented reality. Successful traders know that their assessment of the markets is an extremely uncertain reality that can collapse at any time.
The British economist John Maynard Keynes once said: “I do not know which makes a man more conservative – to know nothing but the present, or nothing but the past. (2)
The crux of the matter is that once you have constructed a reality, you will always find confirmation in charts, news and fundamentals. If I think that prices need to go up now, I will find a trend line that just about fits or find a message among the hundreds of news items that is positive and supports my reality.
The famous trader Paul Tudor Jones said in an interview with Jack Schwager: “Every day I assume every position I have is wrong.” (3)
You also know this phenomenon from everyday life, when our brain makes nonsensical connections and connects things where nobody can be. In the stock market this happens every day.
George Soros, probably one of the most successful traders of the 20th century once said: “Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes”. (4)
This is pretty much the main reason why traders often hold on to a trade until their assumption is confirmed or another reality catches up with them. This collapse of a subjectively constructed reality is the main reason for financial and emotional pain in the stock market.
Those who accept the fact that every trading idea (no matter what time frame, even passive investing with ETFs is a very long construction of reality) is only a subjective assumption can also gain a great advantage from it.
Good traders develop something like a feeling (which in my opinion is a mix of experience and information) and make decisions based on this.
Steven Cohen, one of the most successful hedge fund managers in the world, makes more than 50% of his decisions on a gut feeling basis. Intuitive and simple decisions are often superior to fact-based and complex decisions in situations of uncertainty, the prime example of which is probably the stock market. I will write in more detail on this subject. In the webinar With Experience to Trading Success I explained this scientific insight using the example of a dog that is able to catch a Frisbee.
Once you have made a decision to enter the market, you should not hesitate to act. Our thoughts may be the pillars of our wishes and goals, but they will never become real unless we take action.
Often the fear of mistakes or losses is a big stumbling block. For this purpose I have developed the strategy (better said it is a trick to bypass my mind) that I
(a) in the event of a loss, can get off and on again at any time (This is after all my advantage when I actively invest)
b) I bet 50% of the position if I am unsure or close 50% of the position if the trade goes against me.
This strategy helps me not to get stuck on one point or condition in the market, but to keep up with the “flow” of the markets.
If you still have extreme difficulties in realising losses, you should check whether you have already found the right investment strategy (check your skills and wishes in the article linked above).
5. holding on to an idea
Ultimately, it simply takes time for an idea to take off in the markets, no matter what time frame you are in. This concerns day traders as well as long-term investors.
Benjamin Graham, formative figure for many 20th century investors, once said, “Patience is an investor’s first virtue.” (5)
However, only the investor who pursues his idea consistently and with certainty can be patient. But already alone in the course of the day so many distractions and new questions can arise, which encourage to reject the current investment idea.
For long-term investors this challenge is even greater. Although we read everywhere what excellent returns could have been earned with funds, ETFs or quality stocks, I hardly know of any investors who have really realised these returns in their portfolios. The problem is that most of them stray halfway through the process. The reason is that they have not been consistently true to a strategy. Mostly out of fear or greed. How to develop discipline and focus is what I have described in these articles:
Your focus: The key to success in the stock market
Investment: It depends on your decisions!
Stock market strategies: Give time to learn from mistakes
Finding a good trade is difficult and rare, but not impossible. Once it has been identified in advance, a feeling of “absolute certainty” sets in. Anyone who has ever experienced this feeling knows what I am talking about.
Many investors who have studied the philosophy of passive investing and have understood the most important basic rules are familiar with this moment when it “clicks”, as soon as one has understood the philosophy that is so unusual for our minds. In this moment any fear of loss disappears and is supported by a feeling of absolute conviction and security.
Perfect trades happen more often than we think, by the way. Mostly, however, only in the context of extraordinary events, because then the markets show inefficiencies (…oh, it must have been nice in the past, when there were more of these situations)
Many traders had such a moment of absolute certainty after the opening of trading on November 9 and December 5 last year. Although the events were unrelated, the mass of investors (which ultimately moves prices) assumed that there would be a similar rally as after the Brexit vote in June. Full of self-confidence, a buying wave emerged from which many traders profited.