I have been actively trading the market for about 25 years now and plan on trading as long as can operate a mouse and a keyboard. I am thankful every day that I went totally deaf and was forced to give up my career as a lawyer.
Over the past five years I have learned enough about trading to fill several books. I've probably written over 15,000 articles for Real Money. Many themes have been discussed in a variety of contexts and ways.
I deem these five lessons as the most important.
1. Profits Occur Sporadically
The market is, and always will be, cyclical. It goes through ups and downs of various magnitudes on an irregular basis.
The easiest way to deal with that fact is to embrace it. I've found that the 80/20 rule tends to apply. I will make 80% of my profits in 20% of the time. The other 80% of the time I make little progress.
The problem is that we never know when that period of peak productivity will occur. We must be constantly vigilant and ready to spring into action when favorable conditions occur. When they do occur, we have to ramp up our aggressiveness and profit while we can.
One trait effective traders share is the ability to be patient and do little for long periods of time, and then move suddenly and decisively when the time is right.
Shifting from a patient state of mind to a more active one is not easy.
2. Predictions and Forecasts Are a Waste of Time
In the many years I've traded, I've heard an uncountable number of predictions and forecasts. The vast majority have been wrong or so poorly timed as to be useless. Wall Street loves predictions and forecasts because that is basically what they sell. They convince customers that they can predict the future better they can.
The predictions and forecasts are interesting, and can help us prepare for volatility ahead, but it is the reaction to changing events that is the most important.
Moving to the sidelines as a downtrend emerges will protect you better than any prediction or forecast. It is reacting decisively that works far better than predictions and forecasts.
3. Keep Your Accounts as Close to Highs as Possible
Nothing is more unproductive than making up losses. If you lose half of your money, you have to double it to just return to even. If you are zealous at keeping your accounts near highs, you will outperform over the longer term.
Long-term buy-and-hold investing is often promoted on the basis that it allows you to compound your money and that it is what makes investors like Warren Buffett so successful. However, you compound results when you keep your accounts at highs and continue to produce returns. You can do this equally well -- if not better -- with aggressive trading, provided you focus on keeping accounts at their highs.
Compounding fails to work when you suffer big drawdowns and losses, and that happens to long-term investors and short-term traders.
If you err on the side of not suffering large losses, you will produce better returns as you compound your capital.
4. Use Charts
Charts are often dismissed as voodoo by the same people that are so confident of their ability to predict macroeconomic events, but they miss the main point. Charts are useful because they provide a framework for discipline. There are millions of ways to use charts, but at the heart of every method is cutting losses and letting profits run.
Charts are your best tool for developing a trading methodology to implement the main points I'm making here.
5. No Trading Approach Is Inherently Superior
The best approach to the market is highly subjective. Some people do very well with trend following and momentum. Others do equally well with value plays and fundamentals. What works best will depend you how you view the market and the methodology you use to protect capital and find new stocks to buy.
Work on developing a style that makes sense to you. If it doesn't work as well as you'd like, keep modifying it. The market is constantly changing, which means what works best will shift all the time. Just make sure you keep in mind what I mentioned in lesson No. 1 above -- your profits will come at irregular cycles.
This is a very broad outline of the five key things that will help make you successful at trading.
One of the greatest things about this business is there is always a new opportunity around the corner. As long as you have capital, you have the potential to produce sizable returns.