No doubt, you read this report every week so you can gain some insights into how to profit more from the stock market. This week, I aim to help you with this endeavour by delving into the three essential components every trader needs to integrate into their trading plan to ensure their success, writes Wealth Within chief analyst Dale Gillham.
Trading is more than just making money; it’s about implementing a structured approach that consistently generates profits while mitigating risks.
Firstly, you need to have a good strategy or what is often referred to as having an 'edge'. This means developing a well-thought-out plan that gives you a proven statistical advantage over the market.
Creating a plan or gaining an edge is far easier than you might think. If you’re a trader, your plan could be based on charts, or if you are an investor, it may include studying the fundamentals of a company. I prefer a combination of both as it gives me the best of both worlds.
What’s most important is that you stick to your trading plan, even when things get tough. That’s why I advocate that you document your plan to ensure you stay on track.
The second essential component is to manage your risk and money wisely. This means using only a small amount of your money on each stock you buy, as this ensures you don't lose everything if things go wrong.
As a failsafe, I recommend you don’t invest more than 1 to 2% of your total capital in any one stock.
What’s also essential with proper money management is that you need to use a stop loss to protect yourself from big losses. This is important because it keeps you in the market even if you have a few bad trades in a row. I recommend setting your stop loss no more than 15% below your buy price.
Finally, you need to keep it simple. Don't make things more complicated than they need to be.
Just focus on what you know and keep your trading plan easy to understand. If you're a trader who uses charts, keeping it simple means having a few clear rules that you can easily follow.
There is nothing worse than having a bunch of different criteria for getting into a trade that you can’t explain to your partner as this often results in missed trades because of analysis paralysis or getting into the wrong trades.
If you keep things simple, you will be able to make quick decisions with a high degree of accuracy and take advantage of opportunities when they come up.
Dale Gillham is the chief analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
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