I find investing and trading easy. But then again, Iâ€™ve been doing it for 20 years, so it is somewhat second nature to me. I make money; itâ€™s my career; itâ€™s what I know. I made it my sole focus to be as good as I can be in what I do. But it didnâ€™t happen overnight.
Too often, the people I meet who want to participate in the markets are chasing dreams. Their expectations are unrealistic, and they have been led to believe that all their worldly troubles will go away once they start to invest/trade in the markets.
Real success in the markets doesnâ€™t require a lot of hard work. But if you are starting from scratch, you are going to have to put some effort into your learning journey.
Here are the key elements you need to focus on to successfully make money in the markets. Work on each of these, and you will have far more opportunity for success with your trading or investing.
Not everyone is suited to investing/trading. Personality traits have a huge influence on your decision making process.
With my coaching, I can work out quite early on if someone is likely to be successful or not. That comes from working with thousands of people over years. A lot can be said for the attitude you have towards money, investing and how you approach everything in life.
A Gambling attitude, for example, will result in losing. The lack of Discipline to cut positions, the â€œHope and Prayâ€ mentality, the wild stab in the dark. These mental processes all lead to loss of money when it comes to trading and investing.
In the stressful environment of taking your hard earned cash and putting it into various investment vehicles, being able to control your stress levels and think methodically is absolutely critical.
Mindset is everything when it comes to the markets. As professionals, we spend years learning and training our thought processes to understand market behaviors, and to know how to act/react when situations arise. This is something that just doesnâ€™t happen overnight.
To be successful in the markets, you need to know yourself. Know how you think; know your strengths and weaknesses; know your attitude towards winning and losing. Knowing yourself will detach you from the emotional umbilical cord we have with money, so you can clearly begin to see the functional environment of the stock market.
Learn to Read the Markets
What do you think of when you see headlines such as â€œDOW Jones reaches all new highsâ€, or â€œthe S&P500 index made 23% in 2017â€? Elation? FOMO (Fear Of Missing Out)?
The leading indices are an insight into the fundamental strength or weakness of the broader market, as well as the sentimental reactions of investors and traders. Knowing what indices to read for the type of investing/trading you are doing, will provide you with the basis for your decision-making.
Note how my last statement is an unemotional evaluation of the purpose of using indices to read the markets? Itâ€™s not an emotional reaction such as â€œAll time highs, I have to get in on this too!â€
While I originally trained/studied as a Technical Analyst (when TA was still relatively new to the broader investing world), I incorporate a Top Down Approach to my decision making process. If you cannot understand the bigger picture, you are not going to see the detail. Hence, analyzing the economic, fundamental and technical aspects of the broader market you are dealing in, is imperative.
By learning to read the markets, and having the discipline to do this routinely, you will gain a great insight into the type of environment you are working in.
Choose an Analytical approach
Most people are looking for the easy way to make a decision. â€œWhat is the simplest method for me to choose a stock that makes me money?â€
There are many different tools you can use to make a decision on what position you enter (your strategy/management plan will ultimately define when to sell). The broad categories are:
- Fundamentals, and
- Technical Analysis
I would even include Politics as a fourth category. But that is more an influence than a defining study.
Each of these categories has hundreds of different methods on how to define supply and demand; buyers and sellers; over-valued/under-valued; and/or buy or sell. And combining any number of these tools can lead to literally tens of thousands of different approaches.
What you need to do with your analytical approach, is adapt those tools that suit the Strategy you intend to implement, and that is suitable for the market/s you intend to trade.
For example, if you intend on day trading FX (currency) using momentum strategies, there is no point spending all your time on economic and fundamental analysis techniques. While you may adopt some influence (as a Top-Down approach), your key decision-making tools will be Technical Analysis techniques.
You may decide to use a recommendation service or analytical subscription service to provide you with the means to choose what you invest or trade in. This is a great idea, especially if you do not want to take the time to learn and manage the decision making process.
Just realize that all research and recommendation services are provided by human beings. People who will have a process and a philosophy on how to choose positions. They donâ€™t always get it right, just like you will not always get it right. Difference is, their view on a stock is not going to lose them money. So you need to review the service you subscribe to, have trust in their knowledge/experience/ability, and cater your strategy management accordingly.
From the broad analytical approaches mentioned above, there are hundreds of different tools you can use.
And hereâ€™s the plain truth â€¦. All of them work, at some time or another!
Thereâ€™s no secret strategy that is better than anything else. There is just the understanding of what the strategy is looking for, when it is best suited, what its strengths and weaknesses are.
If you are using a strategy that is failing to make you money, then you have the wrong strategy! But why is it the wrong strategy? Is it because you are implementing it into the wrong market? Is it because you are trading the wrong time-frame? Or is it because of your execution of the strategy?
Beginners are typically only aware of the most simplest methods of participating in the markets: Buy stocks, if they go up, you make money (that of course, does not necessarily you profit because it is only on paper until such time as you exit and realize the gain).
And as a beginner, just because this is all you know does not mean this is all you will use through your journey of investing and trading.
There are strategies for choosing long-term investments; short-term trading, day-trading, position trading, momentum trading or trend trading, IPO investing, Volatility plays, low risk/high risk, strategies that benefit from depreciating Time, or that profit on falling stocks. And each of these could use Economic, Fundamental or Technical analysis processes to help choose a position.
Marrying the right analytical tools to the right strategy is like putting the right gear box on the right engine. Whilst some can inter-mix, not all can.
At the same time, you need to use a strategy (or strategies) that you understand and feel comfortable investing your hard earned dollars. What markets is the strategy best suited? What time-frames? What are the potential returns and risks of this strategy?
Start with strategy that you understand. Become good with that and build your knowledge over time. If you are happy with the types of returns you are getting, then you may not need to consider other strategies. But as mentioned previously, not all strategies are suited to all variations of market conditions. So know the strengths and weaknesses of the strategy you are implementing.
Develop Portfolio Management
Above and beyond everything else, how you manage your portfolio is the key to success!
You can have a successful methodology of choosing stocks to invest in. And your strategy approach may suit that perfectly. But if you donâ€™t manage your portfolio holistically, you can still end up losing money in the markets.
Position sizing refers to how much of your total capital you invest on one position. If you put all your eggs in one basket by placing all your money on one stock, you run the risk of losing a large percentage of your money if it goes against you. Of course, you have that potential of making a strong return if it goes as you expect.
There are no guarantees in the markets. No matter how good you are as an investor, trader, or analyst, there will always be some random event or announcement that causes a stocks price to react unexpectedly. Hence why it is always recommended to diversify your exposure in the markets.
For long-term investors, diversifying exposure across various industries and stocks is the normal approach. You can also evaluate your exposure to the market with various mathematical formulas. The correlation of your investments to the broader market index can provide insight into your rate of return and if you are underperforming or not.
Short-term traders have other factors to consider, especially if using leveraged instruments. While also considering industry/stock exposure, the potential of losing more than the money entered into the trade can have big implications into account management.
Establish rules around how you will manage your portfolio. This might include a Top-Down approach to increasing/decreasing exposure based on Economic/Fundamental criteria. Establish a plan on position sizing, and what exposure to industry you want to hold. Correlate your holdings against a leading market index to establish whether or not your decision making is providing a sufficient return.
Learn, Adapt, Execute
Professional athletes practice their strategies over and over to ensure when it comes to game time, they execute seamlessly. The military is the same. Training is the key.
It never ceases to amaze me that so many people enter into the markets on dreams and hopes and fail to put effort into learning and practicing. In fact, even after 20 years in the markets, I am continually evaluating and learning variations in how I can improve my rate of return and manage Risk.
Success and Failure is not always due to your decision-making. It could be the markets, it could be strategy, it could be a surprise event, it could be your execution.
Without taking the time to develop, learn and practice (and by practice I mean actual trading in the markets, not â€˜paper tradingâ€™), you will never have the opportunity to find areas for improvement.
At MatthewBrownMentoring, our program has been developed to put you onto a path to success based on your goals and objectives, your past results, and with my experience of 20 years to fill in the missing pieces to help you succeed. Without that type of guidance, many investors/traders go around in circles looking for answers in all the wrong places.
You need to take the time to evaluate and critique your activity, results and processes. Try new things, and evaluate. And learn to adapt to changing market conditions.
Because one thing is for certain, the markets will continually evolve. If you donâ€™t evolve too, you will be left behind!