There is really no such thing as an “easy” market to make money in, however some types of markets are more conducive to success than others, and right now we are in the middle of one those types of markets.
If you are not making money in the market right now, you need to seriously re-evaluate your trading (and conversely, if you are making money hand over fist right now, you need to make sure it is because of your trading, not because everything is just going up).
So if your trading P/L is currently bleeding red, here are ten tips that might help put it back in the black.
1. Cut your position size – Everybody goes through losing streaks, and if you are in one right now you should be progressively cutting your position size down until you return to your winning ways. This ensures that you are trading the smallest size during your worst periods. Think of it like an out of control night in Vegas; as it gets later in the evening you should be drinking less, not reaching for the beer-bong.
2. Stop trying to short stocks – No matter what type of market we are in, short selling is probably the hardest thing for a trader to do profitably on a consistent basis. Those that can are part of a very small and specialized group of traders. It may seem “cool” to try to make your money selling short, but what is really cool is just making money. Besides every time you short a stock, somewhere a kitten dies.
3. Trade less (make more) – Take it easy Racer X, you don’t have to be going full bore all the time, (besides you’ll never catch the Mach 5 anyway). There is no law that says you have to trade every day of the week. If you are consistently losing money right now, trading more often will just increase your rate of loss. Dial it back a bit and take that extra time to review your charts and find optimal set ups. Then maybe Trixie will finally pay attention to you.
4. Stay out of low-priced stocks – Trading cheap stocks may seem tempting, especially if you have a smaller sized account, but these types of stocks are often illiquid with wide spreads relative to their price. Not unlike short selling this is a very specialized trading niche, and right now there is no lack of well capitalized and liquid stocks making nice moves in this market.
5. Pay attention to what the market is telling you - If out of the blue your wife starts going to the gym, getting “elective” procedures, and wearing high heel boots to “work,” you better pay attention or know a good divorce lawyer. Each time the market takes a nosedive I see the streams come alive with traders closing out their longs, or going short. But that is not what the market has been telling you. It has been telling you that this is a “buy on the dip” market, where you add to your longs on support and you certainly don’t short there. At some point this will change, but until then don’t try to go against the grain.
6. Trade in the best sectors – The overall market tone is the most important factor in moving individual stocks, and right behind that is sector performance. If you are not trading stocks in the sectors that are moving with the market, you are putting yourself at a great disadvantage. Just look at the coal stocks during this recent rally; they have been nothing but dogs. Make sure that you are trading stocks in the sectors that are moving up with the broader market.
7. Check your methodology – Or more importantly, make sure you have a methodology.
8. Review your risk/reward ratios – Are you averaging larger losses on your losing trades that profits on your winning ones? If so you need to adjust your risk/reward parameters when entering a trade. The minimum you should strive for is a 1:3 ratio, which means you can “win” on a smaller number of trades and still be profitable. For more info take a look at my “Deconstructing A Trade” videos where I cover that subject so often you will want to puke….but in a good way.
9. Eliminate external distractions – One day in 2005 I was battling a bad market, a bad Wi-Fi connection, and was forcing bad trades. Even worse than that, my wife kept bugging me every three minutes or so. “Honey, can you come over here?” ”Yeah, yeah, just give me a minute,” I would say. Finally she said, “honey, I think the baby is coming!” Out of deference to her, and the doctor, and the nurse, and the intern staring at me, I closed my laptop and stopped trading for the day. (Oh man, I wish I was kidding about this story). Point is, if there are distractions in your personal or professional life, they can often cause you to lose focus in your trading. If you can’t eliminate them, it might be best to hold off on trading until you can get a handle on them.
10. Subscribe to a trading service – As I have written about in the past, I am a big fan of quality subscription services. If you are a beginning trader it is like having an experienced mentor, and if you are a seasoned trader, it is like having an extra pair of eyes on the market. The money you make in trading spends the same way no matter if you found the trade yourself, or somebody else gave you a heads up on it, so put your ego aside and make good use of this “tool.”
And of course most importantly, finding an interesting and informative free blog that talks about the relationships between the markets and life, in a humorous and relatable way, will take your mind off your trading losses and let you relax. Just make sure you can subscribe via E-mail or RSS.
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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading - The Best of the Best: Top Trading Tips For Our Times by clicking here.