Stock traders come in all shapes and sizes. No two are exactly the same.
But there’s one thing that all successful traders have in common…something that separates them from the rest.
Any thoughts on what this may be?
It’s a trading style that works for them.
Your trading style is a big decider as to whether you’ll be successful. It really can make or break you.
There are many elements to your trading style. I can’t go through them all today. But I will tell you about one. I believe it’s the single most important thing a trader can do.
I’ll get back to this in a minute. First let me tell you a bit more about trading style.
There’s no single best style. A perfect fit for one person may be unworkable for another. It’s something you develop over time.
Your style is a mix of factors. It includes things like personality, tolerance for risk, and how much time you have for trading.
Take a spot foreign exchange (forex) trader for instance. This is a highly intensive way to trade. It’s a full time job. You can’t trade like this on the side.
Spot forex dealers fit a particular mould. They are typically assertive men in their 20s or 30s.
These guys have nerves of steel. This is a high-stakes game. And it happens at a rapid pace. I spent my 20s on the FOREX trading desk…but that’s a story for another day.
Don’t worry if this doesn’t sound like you.
A spot forex dealer has a particular trading style. It’s well suited to what he does. But it’s by no means the only way to make money.
I’m more interested in a trading style anyone can use. Something more practical.
I know most people can’t sit around a trading screen all day. They also aren’t comfortable with massive amounts of risk. And that’s fine.
There’s a particular trading style that I think just about anyone can use. I call this style strategic trading.
It’s a medium term approach, so portfolio maintenance is relatively low. The style combines a trend following strategy with risk management.
So what’s the key to making big money with this strategy?
Well it’s simple. You maximise profits by letting winning trades run.
Locking in an early gain is often tempting. The problem with this is that it caps your upside. This is a mistake many traders make. Its way they fail to capture big tradable trends.
The key to profiting from big moves is to ride the trend. That’s how you get the ‘outliers’…stocks that rise +100%.
The other side to this is managing risk. Every good trading style has a strategy for this.
Profits can help make you. But out of control losses will break you.
Have a look at this chart. It shows just how my strategic trading style works.
This is a hypothetical trade for the iShares Europe ETF [ASX:IEU]. I’ve taken it from my Quant Trader system’s back-testing.
Gains like this are happening all the time in the stockmarket. This isn’t even a particularly large trend. But it’s close to Quant Trader’s average winning percentage gain.
This example shows the power of letting winners run. You don’t get moves like this taking a small profit.
So develop a trading style that fits your personality and goals. But make sure you think about how you can let your winners run.
Next week I’ll share a special situation with you. It’s a stock my Quant Trader subscribers recently bought. It will really help you get a hold on trading style.
Until next week,
Contributing Editor, Markets and Money
PS: I’ve actually designed an algorithmic trading system that combines a trend following strategy with risk management — it’s called Quant Trader. It’s essentially an extension of my own trading style. This approach was the key to me becoming financially independent at 29. You can read more about Quant Trader here.