5 Tips to Trade Like the Pros

In today's rapidly moving markets, it may seem impossible to keep up with the pros on Wall Street who trade for a living. But it's not that these experts never suffer losing trades or have bad days -- it's just that they have the discipline and know-how to navigate through tough times and continue thriving in the market. Read on for some simple ways to stack the deck in your favor, even if you don't have a key to Goldman's executive washroom.


1. Trade on data, not emotions. Stocks can make major moves based solely on the day-to-day mood swings of the investing crowds -- so how do you avoid getting chewed up by the panic/euphoria machine? By suppressing your fight-or-flight reflex and trading on facts and figures instead.


Of course, there's no single set of indicators that works for everyone, since each individual has a unique investing style, risk tolerance, and trading objective. However, whether you're a conservative buy-and-holder or an aggressive day trader, you can give yourself a solid foundation by taking the time to study technical and fundamental analysis.


Once you've mastered the finer points of moving averages, oscillators, Fibonacci levels, and more, you can move toward developing a set of tried-and-true indicators that you use to uncover potential trades. Then, if a position starts to move against you, there's no need to panic -- simply revisit your initial analysis. If the landscape has deteriorated significantly, it's time to cut losses; if not, it probably makes sense to hang in there for an eventual turnaround.


2. Paper trade as a proving ground. In 2014, the phrase "paper trade" is a little archaic -- but the concept here is timeless. Many sites offer virtual trading platforms at no cost, allowing you to test out investing ideas in a risk-free arena. Before you put real capital at risk, use this platform to experiment with different technical indicators, profit and loss targets, event-based plays, and any other bold trading ideas that cross your mind. By testing the waters without any "scared money" involved, you can see hypothetical trades all the way through to their conclusion -- for better or for worse. That way, you can learn new lessons about trading without paying a steep price for the experience.


3. Act like it's your job. You can't expect to become a truly successful trader if you treat investing like an occasional hobby. Of course, it's not necessary to enter new trades every day or make adjustments to open positions simply for the sake of staying active. However, it's important to stay on top of the stocks and options in your portfolio on a daily basis. Check support and/or resistance levels to make sure they're still intact, read up on any fundamental news, and review the calendar for upcoming events that could impact your trades. You'll also want to be aware of the gains/losses on your holdings, in case it makes sense to take partial profits or pare down a losing position.


Plus, from a broader perspective, it pays to read the financial news each day to keep up with developments in the global economy. It's critical to remain aware of changing fundamental and technical factors that could impact not only your current open positions, but also the decisions you make in placing future trades.


4. Develop a healthy sense of skepticism. There's no need to be a knee-jerk cynic, but it certainly pays to be wary of "hot tips" and "sure things" -- no matter where they come from. If you see a ringing endorsement of a stock on a cable news channel, bear in mind that tens of thousands of other traders just received the same hot tip, which seriously diminishes any edge you might have otherwise had. Meanwhile, your brother-in-law may have the best intentions, but it's somewhat unlikely that he's uncovered the one stock investment that's going to usher you immediately into early retirement.


In fact, even if a respected financial publication is singing the praises of a stock, you may want to think twice before investing -- after all, there's not much benefit in being the last guy on the bandwagon. To be clear, there's no need to dismiss stock tips or financial media coverage out of hand. Instead, if a tip piques your interest, run it through the same paces that you would any other potential trade. If the idea holds up to analysis, feel free to run with it -- but if the trade looks overcrowded or too highly speculative for your tastes, stick with your methodology rather than succumbing to the fear of missing out.


5. Manage your money carefully. Before you ever enter a trade, you should know exactly when you're going to close it. By determining a profit target and maximum loss in advance, you'll be able to sidestep the emotions that come into play once the trade is up and running. Rather than sacrificing your profits to fear and greed, you'll be able to close out winners after a healthy gain and limit losses on your underperformers. To ensure you stay disciplined, place standing closeout orders with your broker at the same time you enter the position.


And, of course, don't trade with money you can't afford to lose. Invest only your dedicated trading capital, and avoid piling too much cash into any one position. To help make the most of your winning streaks (and minimize the impact of slumps), consider Courtney Smith's "fixed fractional bet" system. In this approach, you invest a set percentage of your account (such as 10%) in each trade. As your account grows in size, you're able to pour more capital into each trade -- and if a few losing bets take their toll, you risk proportionally less money until your bottom line recovers.



Basics of Contrarian Investing


It's easy to mistake a contrarian investing approach for being just plain contrary. However, an informed contrarian never disagrees just for the sake of playing devil's advocate. Instead, a savvy contrarian investor bets against the crowd only when the prevailing evidence suggests the crowd is headed in the wrong direction.


"The public is right during the trends but wrong at both ends," wrote Humphrey B. Neill in The Art of Contrary Thinking, and this theory has held true through bull and bear markets alike. With price action in stocks based on simple supply and demand, it stands to reason that once the majority of active investors have bought into a trend, there simply isn't enough demand left to support continued gains for much longer. At that point, any sign of weakness in the shares could spur a large-scale plunge, as all of those traders rush to get out with some profits intact.


With this in mind, contrarians seek out situations where the price action is beginning to break down, but sentiment is still overwhelmingly bullish. By adopting a bearish stance on these types of stocks before the momentum on Wall Street has started to shift in earnest, contrarian traders are poised to profit all the way down to the shares' eventual bottom.


On the other end of the spectrum, a bullish contrarian setup would involve a strongly performing stock surrounded by plenty of skepticism. In this scenario, going long before the rest of the crowd changes its mind could translate into some healthy gains throughout the duration of the uptrend.


Of course, never forget that the public is right during the trends -- so a solid contrarian analysis should involve an objective consideration of the stock's performance in context with the prevailing sentiment. If sentiment is upbeat on a stock that's trending higher along multiple layers of support, it's quite possible that the positive momentum will continue. On the other hand, if everyone appears to be bullish when the shares are declining, it's a potential contrarian trading opportunity. 


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About Bernie Schaeffer

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