I have been trading stocks for almost my entire adult life. Trading is my life’s passion, and I have made about every trading mistake you can think of during my career.
Here I am sharing the most important trading lessons I have learned over my career so that you don’t have to make all the same mistakes I’ve already made. Here are the 7 most important trading lessons that every trader needs to know to become consistently profitable trading stocks.
1. Obey Your Stop Losses
You have probably heard this advice so many times, it is almost cliche. But everyone knows people who have blown up there account because they didn’t stop out of their positions when they were supposed to. Obeying your stop losses are obviously crucial to keeping losses small. What is less talked about are the times when you get out before your stop loss is hit, but your target hasn’t been met either.
Have you ever stopped out of something because the stock dipped, you got scared, and stopped out prematurely before it even hit your stop loss? The stock probably reversed right after you got out, and then made that exact move you were anticipating. Obeying your stop losses to keep you in winning trades is just as important as keeping losing trades small.
2. Come To The Market Prepared
Trading stocks is so much easier when you have done all the preparation before the market opens. If you come to the market after doing zero preparation, you shouldn’t trade at all that day.
When you know what stocks you are watching, and what prices you will enter and exit at before the market opens, your trading will become so much less stressful and emotional. When the market opens, you shouldn’t be having to do much thinking. It should mostly be about execution.
3. Have A Daily Max Loss
Trading stocks for a career is about survival. At any given day, you could lose your whole trading account if you lose control. You need to have a number that if you lose that much money in a day, you call it quits. This is what a daily max loss is. Let’s its a $1000 for you. As soon as you go down $1000 on the day, you close out of everything, and call it quits for the day. Learn more about how to set a daily max loss in this article here.
4. Never Take Early Profits Because You’re Scared
Early profit-taking has big consequences. Letting your winners run is just as important as having small losers in trading. If you have a trading system where you have a low win percentage, you will not be able to make money from the stock market in the long run if you take early profits. It is easy to take profits as soon as you are green, especially after you have been on a cold streak. Stay in your winning trades as long as you can. Take partial profits at your first profit target, and let the rest ride.
5. Take Partial Profits
Partial profit taking can greatly increase your patience in a trade. One of the biggest problems a lot of new traders have is that they don’t take profits when they are up big, because they will assume it will keep going up. However, most new traders will get emotional when they see a big unrealized gain evaporate.
Taking out half of your shares at your first profit target will give you some cash flow, while also keeping you in position to capture a bigger move. Everyone has a different style of trading, but I’ve found that this helps the majority of my students trade less emotionally.
6. Increase Your Position Size on the Best Setups
Not all trades are created equal. A+ trades don’t come along every day. But when they do, you have to hammer them with big size. Just like the poker player bets big when he has pocket Aces, you as a trader have to bet bigger when you know the probability is higher the trade will play out.
If you just take 100 shares on every setup you see you are doing yourself a huge disservice. Once you can identify the setup you perform best in, you know what to put big size on, what to trade with half size, and what to avoid completely.
7. Avoid Overtrading Like the Plague
Overtrading was (and sometimes still is!) one of the biggest challenges during my career. Develop self-awareness to see when you are starting to get emotional and overtrade. In trading, we are own worst enemies. In order to make it as a trader, you need to develop rules to protect your trading account from your most self-destructive tendencies.
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