|
Trading on the 'floors' is done
at the markets. The futures markets trade 'in person' and the trades
take place on the floor of the exchanges like the new York Stock
Exchange. This is the image most people have in their minds, and the
one portrayed in movies and on television. The floors are basically
overcrowded with hundreds of people shouting and gesturing to each
other, talking on phones, watching monitors, and working at terminals.
Here is a simple scenario of an exchange floor trade:
The investor tells the broker to purchase 100 shares of AJAX. The
order is sent to the floor clerk at the exchange. The floor clerk
sends the order to a floor trader who goes looking for another floor
trader who has 100 shares of AJAX to sell. The two agree on a price.
The deal is completed. The entire process can take a few minutes.
Several days later the investor receives a piece of paper in the mail
confirming the trade.
Electronic Trade
NASDAQ, unlike the New York floor, is 100% electronic. The computer
networks match buyers and sellers, without bothering with brokers.
Both small investors, and large investors including those who handle
pension funds and mutual funds prefer this type of trading.
There is instant confirmation of the trades, and the trades take place
in real time - which is vital if a stock is spiraling up, or down.
Unlike what most people think, they cannot access the trading floor.
Even if they work through their home PC, they are still working
through a broker, or at least, a broker's computer network.
Why Understand Trades
One of the most important aspects of understanding a trade is to manage
your risk. The idea that you can wait until a stock reaches a certain
point and then sell is unrealistic. Even if a buyer does have a
broker, there may be 32 different clients wanting to buy or sell a
certain stock. This means that an individual's order can happen
several minutes, to an hour or more after the sale is placed. This can
have a direct effect on the profit or losses endured by an individual
investor.
Step one: Keep your awareness high while you're in the moment. During the
moment when you find yourself tempted to deviate from your plan, pose
yourself this simple question: "Am I acting on emotion here or would
this be in alignment with my better judgment?" Being aware of how
you're feeling - at the time - is what is key, and then asking
yourself the question. Often, the mistake happens because we simply
are getting caught up in our emotions and the simple act of remaining
alert to the emotional surge will help to keep things in control.
Awareness is only the first step though.
Step two: Realize the real source of the problem. Often the urge to
deviate from your plan is coming from a fear. Here are a couple
examples.
* Getting into or remaining in a trade when you know that you shouldn't
often comes from the fear of missing an chance to profit. What is
often incorrectly attributed to greed is often a scarcity mindset
coming into play. The fear of saying "No" demonstrates the fear that
there "isn't another bus coming soon". When you don't have the firm
belief that there are numerous profitable opportunities to be
capitalized on and that you have the know-how to take advantage of
them, then the fear arises in the moment.
* Failing to pull the trigger is usually the fear of screwing up more so
than the fear of loss. On the surface it feels like the fear of loss,
but the risk on any given trade is easily foreseeable. This one is an
issue of self-doubt due to previous mistakes.
When reading the examples above, you probably noticed a common
underlying factor. There is a way to counter fear, and the 3rd step is
to address this specifically.
Step three: the most effective way to counter fear is through building
your confidence. Your daily life is full of risk and yet you can
function will amidst this risk without any fear all. Why? Because you
have the confidence to deal with it effectively. When you drive your
car, go out in public, walk down a flight of stairs, you have no fear.
You have developed the skills to perform these activities and do them
well and without getting hurt. The potential for harm is there, but
you have the confidence to handle these situations.
Stock trading is a relatively simple activity compared with other
professions, particularly with the tools available in today's world.
It is certainly within your abilities, and as you educate yourself on
and build your skills, you'll find that your fears subside as your
confidence grows.
Rule 1: I must follow my rules.
Naturally if you develop a set of rules they are to be followed. It is
human nature to want to vary or break rules and it takes discipline to
continue to act in accordance with the established rules.
Rule 2: I will never risk more than 3% of my total portfolio on any one
stock trade.
There are many old traders. There are many bold traders. But there are
never any old bold traders. Protecting your capital base is
fundamental to successful stock market trading over time.
Rule 3: I will cut my losses at 5% to 15% when I am wrong without
question.
Some traders have an even lower tolerance for loss. The key point here
is to have set points (stop loss) within the limits of your tolerance
for loss. Stay informed about the performance of you stock and stick
to your stop loss point.
Rule 4: Never set price targets.
This is a style that will allow me to get the most out of rising
stocks. Simply let the profits run. Realistically, I can never pick
tops. Never feel a stock has risen too high too quickly. Be willing to
give back a good percentage of profits in the hope of much bigger
profits.
The big money is made from trading the really BIG moves that I can
occasionally catch.
Rule 5: Master one style.
Keep learning and getting better at this one method of trading. Never
jump from one trading style to another. Master one style rather than
become average at implementing several styles.
Rule 6: Let price and volume be my guides.
Never listen to any opinion about the stock market or individual
stocks you are considering trading or are already trading. Everything
is reflected in the price and volume.
Rule 7: Take all valid signals that show up.
Don't make excuses. If an entry signal shows up you have no excuse not
to take it.
Rule 8: Never trade from intra-day data. There is always stock price
variation within the course of any trading day. Relying on this data
for momentum trading can lead to some wrong decisions.
Rule 9: Take time out.
Successful stock trading isn't solely about trading. It's also about
emotional strength and physical fitness. Reduce the stress every day
by taking time off the computer and working on other areas. A
stressful trader will not make it in the long term.
Rule 10: Be an above average trader.
In order to succeed in the stock market you don't need to do anything
exceptional. You simply need to not do what the average trader does.
The average trader is inconsistent and undisciplined. |
