10 Lessons in Trading by Alpesh Patel
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10 Lessons in Trading by Alpesh Patel
Decide the trading style and tools that suit you The first step into trading is to decide what kind of trading you want to do: trade allday long or only a few hours per day? Trade end of day ideas or scalp a few times during the day? This decision will determine the tactics you need to use, the timeframes you must apply them to and even which instruments you might want to focus on. One of the beauties of trading as a business or even as a part-time thing is that it can accommodate different kinds of approaches and can suit different lifestyles and goals. However, the important thing is to match each approach with the appropriate tools and practices. This means creating a plan of action that will include your desired style of trading (like intra-day, swing trading, scalping or end-of-day positions), your trading tactics and rules for entering and managing your trades and your tools. Tools like information sources, trading platforms, analysis' indicators and/or automation solutions. All these are going to be part of your arsenal and will make your life easier and your decision-making process faster and more effective.
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10 Lessons in Trading by Alpesh Patel
Be informed, trading is all about making informed decisions Find a reliable source of information, a website or a newsletter that can quickly and effectively let you know what the conditions of the market are and base your decisions on facts and not on instinct or luck. There is an abundance of news and information sources out there, especially now in our technologically advanced era. News and analysis websites like Bloomberg, Financial Times, Reuters can provide a stream of news 24/7, technical analysis and ideas websites can be found by the dozen and even social media platforms like Facebook, StockTwits or even Twitter can provide crucial insight on the social aspect of trading. One should be mindful though of two potential pitfalls: one is the credibility of the source and the other whether this source has an agenda or not. More reputable and independent sources can mostly be relied upon whereas marketmakers and/or brokers sometimes have their own goals in mind. And secondly, one should also keep in mind that too much analysis leads to paralysis in the end, meaning that you should look to have as much information as necessary to make an informed decision but no more than that. Keep it simple, find a source that you understand and suits your style and give it a fair chance. My site InvestingBetter.com offers a selection of amazing newsletters and reports, they are worth taking a look at.
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10 Lessons in Trading by Alpesh Patel
Get educated and receive proper training from proven professionals This is an absolute must, education should be one of your first concerns. If you skip this step you will run out of money or patience before you get the hang of trading. And that's the number one factor that leads people to abandon trading very quickly and paint a very bad picture for it. In truth though they haven't given trading and themselves a fair chance as it requires a learning curve like every other activity in life. The difference here is that every mistake, every bad decision literally costs money and capital. And takes away the initial excitement chunk by chunk leaving frustration in its place. So don't underestimate this important lesson, there is an abundance of educational resources out there, invest time and money if needed to get yourself properly educated ahead of time. It's really an investment to yourself and the most effective capital preservation tool.
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10 Lessons in Trading by Alpesh Patel
Be adequately capitalized Trading is like a small business, it requires a starting capital. You wouldn't want to fund your account with such a small amount that a few mistakes will wipe it out. You need to provide yourself with the opportunity to make mistakes and still have the chance to correct them and move forward.
Always keep in mind that making a loss means that you need to over-perform the next time to cover your loss and break even. It is key to understand that for example a 5% loss requires a 5.3% gain just to bring you up to your original capital and so on. So each loss hurts more than an equal win, this is an important lesson to understand. Hence having an adequately funded account means that you prolong the life of your trading career and allow yourself to make mistakes, learn from them and then overperform to break into profits.
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10 Lessons in Trading by Alpesh Patel
Don't underestimate the psychological part of the game Trading is as much about psychology as it is about technical patterns and trading setups. It is important that trading decisions are made without fear, doubt or anger, if you like an opportunity and you believe in it go ahead and take it, if not leave it aside. This is especially true as trading as an activity can sometimes go against our own human instincts and our brain is not always wired to perform well when dealing with facts and emotions at the same time. In an ideal scenario trading should be done without any emotional factors taking effect but we're human and this is not possible. What is possible however is to develop a system and a set of rules to rely upon and make trading decisions part of this process. And again trading decisions should be kept simple and fast, make sure that you have followed your decision-taking rules and just go with whatever conclusion they add up to. If your system indicates a buying opportunity with a set parameters for your target and your stop then go for it without doubts. Keep it simple and repeated, if you result in more losses than you'd expect then you might need to tweak your rules or tactics a bit. But always follow them religiously so you find out as fast as possible whether they're the wrong ones and need tweaking.
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10 Lessons in Trading by Alpesh Patel
Trading involves losing money as well as making it You will lose money when trading, we all lose and this is a fact. However this is an important thing to digest and it amounts to two lessons essentially: first, if you can afford to lose any money from your trading account then you shouldn't risk that capital at all and secondly, if you can't get over the fact that you will be wrong and therefore lose money then maybe trading is not the right thing for you.
The first lesson should really go without saying but people sometimes don't understand the simple truth that losses are inevitable. And they will be frequent, that's inevitable too. No one can be right all the time, not even more than 7-8 times out of 10 consistently. And usually when it comes to trading being able to be right just a bit more than you're wrong is enough and most times is the best you can hope for. So if you can't afford any losses on your capital then that capital shouldn't be part of your trading account. Find an amount of money that you be comfortable to put under risk and trade with that. And secondly, don't ever think that you can trade profitably if what you're looking to get out of the markets is an ego boost, a confirmation that you can be right more times than not. Losses are to be loved, losses teach us valuable lessons and improve our tactics, losses when cut to a sustainable amount prove to us that we're ill-positioned in the markets and maybe we should reposition accordingly. So losses are not to be feared or get stuck with, losses are to be loved and treated as helpful signs along the road.
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10 Lessons in Trading by Alpesh Patel
Win more and win bigger You should focus on winning more times than you lose and that your winners make you more money than your losers cost you. This sounds simple and stupid, right? But at the end of the day that's what trading is all about and that's why it is called trading. You will make choices - aka "trades" - and some of them will go well and some of them will go wrong. The key here is to try to make more good decisions than bad ones and also make sure that when a trade goes your way you will get paid more than what you'd lose if it went badly. And then repeat this simple plan again and again. After all, if you could achieve a small edge on both these factors do you really need anything else? Suppose that you win 55% of the time on your trades and you make 1% on your winners and lose 0.5% on your losers. Doesn't sound too exciting, right? However a sustainable performance like that will make you infinite profits if repeated forever. Just think how casinos (yes casinos) make their money: they have the odds stacked in their favor far less than 55% - most times 0.5% or 1% - and they just pay winners an equal amount to what they get from losers. However they simply repeat this process for an infinite amount of times because they know that this way they will make an infinite amount of money.
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10 Lessons in Trading by Alpesh Patel
Never fight the market, the market always wins It makes no sense trying to go against a multi-trillion dollars market because you're angry or "you know better", the market will wipe you out. Understand when you're wrong on a trade and get out as soon as your stops are hit, never move them or add to the losing trade. What that means comes down to two lessons basically: first, that you should not get stuck to a losing trade more time than what's needed to find out that your initial idea was wrong. And secondly that, again trading is a game or a business where ego has no place.
Talking about not going against the market, what is really important to understand is that each trade is essentially a bet, an attempt to get a feeling of where the market is heading. And as such there are levels and indications that pretty much confirm the market's intentions for the time being so if your trade is towards the opposite direction simply get out of it. Don't get fixated and try to stay in the trade "just a bit longer" only because "it might eventually reverse in your favor", it rarely does. And most of the times you will lose more money than you should and also waste time waiting for more or less a miracle or better put a rare exception.
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10 Lessons in Trading by Alpesh Patel
And talking about "the market being irrational and wrong" and having the ego to suppose that you know better, let me be crystal clear here: there's no right and wrong in trading. No one person has all the information available to assess what would be the correct reaction of the market. And even if one did have all the information it wouldn't matter because the markets operate on the basis of supply and demand. And if the consensus is to go higher it doesn't matter if it makes sense or not, it will. So don't try to outsmart the market or stomach supposedly "temporary" losses, the market will always outstretch you to a point where you simply can't take it. Instead, trying to understand what the market wants to do and calmly follow it is much simpler, much safer and mostly stress-free.
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10 Lessons in Trading by Alpesh Patel
Keep notes or even better a trading journal Trading requires self-guidance and selfimprovement. Keep track of your trades, take notes on why you took that trade and how it ended up and review them every couple of weeks. Trading is a business of habit and our target is to establish good, profitable habits and get rid of the losing and distracting ones. And the only way to do that is by keeping track of what we did, why we did it and how it ended up. It's like having a coach or a mentor by our side, analyzing and improving on your performance. And trust me, your own self is most of times enough to be that mentor. The truth is that we mostly know what we should do and what we shouldn't, provided that we have a trading plan with rules and conditions in place as I mentioned above. However when it comes time to actively trade the markets inexperienced people tend to throw their plans and rules out of the window and just go with their gut. And this is where things tend to do horribly wrong. So having to keep a journal not only allows us to review our past performance and improve our mistakes it also helps us in another subtle yet incredible way. You see, when you have to note down why you're taking a trade so you can later review it, at this very moment you have to verbalize and justify your way of thinking. And at that same moment your rational mind steps in and tests whether what you're currently doing or planning to do makes sense. So you see it acts as "rationale police", proactively preventing you from getting carried away. Keep a journal, note down everything you want to do and why you want to do it and you'll be amazed from the results.
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10 Lessons in Trading by Alpesh Patel
Choose an appropriate broker and a user-friendly platform Last but not least, trading is always a partnership, a collaboration between the trader and his broker and the software that he/she is using. It might seem trivial but think of this: what good would it do to you if you have all the necessary knowledge and tools, the best trading ideas and psychology to test them but your broker or the trading software just won't play along? When it comes to selecting the company with which you'd like to trade with it is important to do your research.
Pick a regulated, adequately financed and well-recognized broker to trade with. Partner up with an established company that will give you all the support you will need and has no conflicts of interest with its clients. After all these are the people that make sure that your trades reach the markets, your capital is safely deposited to a segregated account and is there just for your trading needs. And also pay special attention to using a user-friendly, easy-to-use and responsive platform. It's no use to have amazing trading ideas but having a platform that simply can't keep up with you or takes too much time to execute your orders. Or fails to update your profits and losses or simply can't connect to the trading servers - yes, that happens sometimes. There's a plethora of choices out there both in terms of brokers and platforms so find one that you feel comfortable and safe with and enables you to do everything that you plan to do with your capital.
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