Follow us on Twitter @Schwab4Traders. This blog updates the first Tuesday of the month; next installment publishes September 4th.
I am a trader and man do I love it. I love looking at charts, spotting trends, and building trades. I love using screens to find trade setups, and I get excited when I find one or two stocks that fit perfectly. I trade because I enjoy it. That’s what this blog will be about; the joys, and perhaps the frustrations, of trading.
When you’ve made the decision to trade the stock market, you did so for a reason. Perhaps you recently retired and want to start a new hobby. Maybe you need the additional income on a monthly basis, or you may just want to trade for fun (gasp!). Regardless of your reason, it’s important to know why you’re trading. This will serve as the guideline for developing your strategy and your approach to trading the market.
I believe the proper mental approach to trading means limiting your emotional tie to your money. Don’t misunderstand me; it’s imperative to love your money. Save and protect your money. You earned it. What I mean is that when trading, it can be helpful to incorporate an amount of money that allows you to remain impartial and objective. This is risk management 101!
Unfortunately, this is not how I got started trading the market. I was young and naive, believing that larger positions meant larger profits. While this is true, it also opened the door to greater losses than I could stomach. I learned about risk management and a disciplined approach to trading via a school you might have heard of -- the School of Hard Knocks (Stock Market campus).
I had to lose my own hard earned funds in order to see the merits of trading discipline. I hope this blog will give you some insights and lessons that you won’t have to learn through actual monetary losses. I’ve taken the losses so you don’t have to!
In coming entries, I will discuss trading methodology, risk management, and stock screening techniques. If you find these topics interesting and helpful, you can join one of the many Schwab Live Daily webcasts my peers and I host to supplement your learning and provide real-world examples relying on these principles.
Trading is an on-going learning experience. Implementing rules to structure your approach should give you the confidence to trade and to stay within your lane.
So, start small. Try limiting yourself to no more than 10% of your portfolio to one stock. Use small risk amounts, like 1% to 3% of your ‘trading portfolio’ and remember that this portion of your investments should also be small relative to your long-term portfolio (think 10%-15%). It might not be as exciting as you expected, but don’t allow excitement to be the driving force of your decision making.
Be disciplined, be consistent, and be true to yourself and you will be rewarded in the long run. Remember, perfection is not the goal. You’ll have winners and you’ll have losers. You’ll have a better opportunity to be profitable in the long run if you manage your risk effectively, take small losses, and let your profitable trades run in your favor.
Join me next month as we’ll continue the conversation and dive into the Top-Down trading method.