Trader Roundtable: Expert Strategies and Tips

Trading has never been easier thanks to increased access, low to no commissions, and an ever-expanding array of investment choices. But trading profitably remains as complex as ever.

We sat down with three of Schwab's leading trading specialists—Randy Frederick, Joe Mazzola, and Nathan Peterson—to discuss how to potentially limit your losses and increase your upside.

Randy: Get familiar with a small set of stocks or funds and add or trim those positions regularly as opportunities arise. For example, I've traded sector index ETFs for years. On a down day when some of them drop more than 1%, I'll add a handful of shares to those and sell from the sectors that are up. I've found that taking incremental profits and using them to add to a holding that has pulled back a bit can be a sound strategy for outperforming the market over time.

Joe: I'd second that. Get really familiar with eight to 10 stocks. Learn how they tend to trade, within what ranges, and how they react to earnings and other news. You'll develop a comfort zone with those core names and learn to spot opportunities to profit.

Nathan: I come from a technical trading background, and I always advise those starting out with technicals to consider just going with the trend. When I first started trading, I would try to "catch a falling knife"—buying shares of stocks in sharp downturns that I thought were oversold and had the potential to bounce. But timing those turns is hard, and I got cut more often than not. A stock in a downtrend or uptrend can continue in it for quite some time, so if you want to take the opposite side, do yourself a favor and wait until the trend has provided technical confirmation that the tide has turned.

Nathan: That valuation is a terrible reason to be bearish on a stock. There have been so many stocks over the years where I thought, There's no way this multiple can be justified, but the price just kept charging higher. Particularly when a company is in its growth stage, the market is constantly reassessing where that stock should be priced based on its potential revenue and earnings trajectory, making it extremely hard to call a top.

Joe: Do what you can to keep your emotional biases out of your trades. There was a stock I used to trade that just repeatedly killed me because I was convinced it was coming back down. At some point, I had to acknowledge my inability to analyze that specific company—and if you don't get it, don't trade it.

Randy: We are emotional beings, so it's hard to completely take feelings out of it. I've been in this business for 36 years, and I got pretty stressed out in the early days. It took me about three to four years of trading very actively to accept that I can't be a perfectionist. You must recognize that sometimes you're going to lose money. The key is to keep those losses small and learn something from each one.

Joe: I think that has to be the goal. Otherwise, you could just put your money in an index fund and save all the time and stress. That means you should be an objective evaluator of your performance, just as you would of any active manager looking to justify their fee. If you're not doing better than the market on a sustainable basis, it might be time to find something more rewarding to do.

Nathan: I have several protective rules I follow no matter what happens. One of those is to honor the simple moving average [SMA]. If a stock I hold dips and breaks its 20- or 50-day SMA after not doing so for several months, or clearly breaks a long-standing trend, that's my cue to exit the position and reassess. No questions asked, no rationalizing my way out of it. If it happens, I realize my gains or cut my losses.

Joe: When I started out, I would trim from my leaders and use those profits to buy losers. But I noticed that I kept cutting off my nose to spite my face. Nine times out of 10 I should have let those leaders run. Technical analysis helped me identify which leaders were most likely to run, which boosted my profits quite a bit.

Randy: As an avid tennis player, I liken trading to tennis: You don't have to win all the points to win the match. Also, the score often isn't a true reflection of how you played. It's important to recognize when you correctly called it and when it was just dumb luck. You should always ask yourself whether your process has demonstrably improved your record of success. Execution can be a matter of luck, but luck tends to wash out over time. So, if you're experiencing losses more often than not, it's probably time to reassess.