So you want to know how to outperform the market? You have been trying to study all of the best strategies. Learning how the pros make money. How hedge funds make money. If you still can't figure it out. Let's break it down to 3 easy steps.
- Money Management
- Trade Management
You probably read this or heard about this on every road to financial freedom. Unless you are following Reddit's r/wallstreetbets YOLO section. ( Side note if you think you are having a bad day, check this out) The truth about money management is how much do you want to make. If you are expecting great returns than your risk will be pretty high. That doesn't mean putting all your eggs in one basket. That does mean trying to beat the market. Trying to out beat the earnings, Fed rate cuts, and company buyouts. Are you going to win big? NO. Buying that one call or put options can give you a quick hundred bucks. Buying opening gaps during the open are also quick easy to take profits in options. This is a skill someone starting off in the market should not try. If you have a bigger account and want to live off the market that monthly dividend is a good way to go. If you have a $240,000 account size you can be cashing in $12,000 a year on only dividend ETF (low risk). Your numbers may vary if you want you to choose a different risk portfolio.
Find out how much you want to risk and they make your own plan. Are you willing to risk it all?
Trade Management- Entries and Exits, Positions Size
Now we get into the fun part. When do I exit and enter a trade? How many contracts do I buy?
There is no golden answer to this. Some traders have rules set in place when a trade hits a trailing stop or set amount they exit the trade. With entry, people will use an indicator or fundamental do decide when to enter. The most common along traders are using support and resistance as profit targets and stops. I use support and resistance to trade but I have a few other rules in place. For example, my potential lose can not be more than $100 or I don't enter the trade. My profit target can be sometimes at $1000 risking $100 or $300 and risking $200. I found this to work perfectly in my style of trading but for some, it may not work out. There are a ton of strategies that use the same indicator as an entry and exits. Like the MACD cross over, Moving Average crossover, Bollinger bands, and so many more. There is no one indicator that is the golden ticket to perfect trades. You will have losers that is part of the trading. The key is to stick to the rules you set and if you are in a losing trade do not move the stop down even more.
When should you take profits?
Taking profit is the key to keeping your account in the green. Do you get that feeling that every time you sell it goes higher even more? You should consider adding more to your position size. This way you can take half during your regular profits and let the other half ride out. If you cant afford more position size? Go back to your rules what is your daily profit. Is it possible to hit your profit target in one try, every time? What is your avg trade? If you do not know the answer to these questions it might be time to look in a trade journal. The trading journal is so you can track all your trades and understand your trades. Once you know your avg trade is $50 and your daily target is $200 then aim for a $50 profit target. Don't let a green trade go into a red trade. If you have some profit and the trade is not looking good, take the profits and run.
Are you angry that you lost money? Take 3 deep breaths and focus on what you are about to read. (Breath in.......out) Taking a loss is telling you did something wrong. STUDY. Study that trade you just took and find out what you did wrong. If you didn't everything right from your game plan but you still end up losing trade after trade. It might be time to revisit your rules and game plan. Trading is an art it takes time to master it. When you start trading in the morning be focused. If you lose your first trade dont let that take trades to win back your losses. You should always be following your game plan. Leave your feelings at the door and pick them up on the way out. If you can't trade with no feelings, try meditation or a walk outside with no phone. Find good habits that help you relax. Trading is not a stress-free job.
- Money Management: What is your risk level? Are you truly willing to risk it all? 5% avg loss is common in the markets.
- Trade Management: You must know your exits, entries and position size. All three are very important, set it as part of your rules of trading.
- Trade Journal. A must when trading. Use an excel sheet or find a brokage provided on. Stage Five Trading is a good start.
- Never let a green trade go red.
- Leave the emotions at the door. Trading is an art.
- Learn meditation.