How Do I Invest: The 3 Key Steps You Must Master To Be A Successful Investor And Trader
Investing and trading is becoming more and more popular amongst ordinary people like you and me because it offers the opportunity to earn a lot of money. Another reason is also that more people want to take responsibility for their own financial future and want to stop depending on their financial advisors. So it is good to know before you jump into this arena that there are 3 key steps you must master in order to become and be a successful investor and trader.
The 3 key steps are listed below.
1. Psychology of Investing and Trading
There is no question that the psychology of investing and trading is the hard part of investing and trading. The intellectual skills can be easy. But actualizing those skills is usually hard. It is said that investing and trading is 90% psychology. The rest is split between Risk Management and Investment Strategies. Actually, it doesn't matter if it's really exactly 90% or a little bit less. It shows that the psychology is the dominant part of investing and trading. It is the psychology that stops most people from making the massive amounts of money possible and living the life they truly want.
As human beings we have emotions and it's good that this is the case because our emotions often serve us well and help us making better decisions. Emotions are like the signals on a radar screen that alert us when something is good, bad, positive, negative, disturbing, worrying, you name it. The diversity of emotions is huge. However, when it comes to investing and trading our emotions are often not supportive. At its core our emotions just want to protect us but this is exactly what's preventing most people from being successful investors and traders. Our emotions let us act and do things that we shouldn't be doing. We show certain behaviours that are counterproductive for our investing and trading.
For example:
+ We don't take a trade when our trading plan tells us to.
+ We overtrade.
+ We put in a stop order to reduce our losses but as the price moves towards our stop loss we adjust it and end up not taking the stop.
+ Or we hesitate too long to take a trade.
Does this sound familiar?
Most people are unaware of how much their emotions really impact their investing and trading. If there is one guarantee then it is that you will be affected by 'your' psychology. The sooner you understand and accept this the better it is. So how do I invest when I tend to be an emotional person? Your first goal must be to learn to master your emotions. When you accomplish this your chances are very high that you can be a successful investor and trader.
2. Risk Management
The second most important part of investing and trading is risk management. It is even more important than the investment strategies you apply in your trading. This may surprise you but you can have a successful investment strategy yet with the wrong risk management you can actually lose money. For example, a lot of people focus on getting a high win rate meaning the number of winning trades is high relative to the total number of trades. Let's say 7 out of 10 trades are winners. This would mean that you have a win rate of 70%. However if you win a $100 on each of those trades (gain of $700) and you lose $300 on each losing trade (loss of $900) you end up with a total net loss of $200. This simple example should illustrate that you must manage your risk first and foremost.
Let us draw another example. If your win rate is 50% meaning 5 out of 10 trades are winners, common sense would suggest that it is hard or even not possible to be profitable in the long run. However with the right risk management your win rate could even be as low as 30% and you could still earn money.
How is this possible?
Simply by following one of the most important success rules in investing and trading. It states that your average winners should be bigger than your average losers. To be more specific if the 5 winning trades in the above example earn on average $200 (gain $1000) and your losing trades produce only a loss of $100 each (loss of $500) you will have a total net profit of $500. This is also referred to as the Reward to Risk ratio which in this case is 2:1. You win double the amount on a winning trade compared to the loss on a losing trade. If you follow and practice this simple rule 'religiously' you will definitely be a successful investor and trader.
3. Investment Strategy
The investment strategy is the third key step on your way to be a successful investor and trader. First of all, there exist a countless number of profitable strategies you can use to invest and trade in the markets. The decisive factor is that you find the right investment strategy that fits to you and your personality. Investing and trading is an intensely personal endeavor; no one strategy or style fits everyone.
So you have to identify which type of investor you are and what may work best for you based upon your:
+ needs
+ goals
+ risk tolerance
+ investment horizon
These criteria will determine which product is suitable for you (stocks, bonds, mutual funds, ETFs, futures or options) and how you should invest in and trade these products (long term, medium term, short term).
The techniques to be used also depend on the amount of time you want to spend with your investing and trading. If you want to be more active you could use techniques such a position trading to catch market moves that last from several weeks to months. Or you could use a swing trading approach where you stay in positions for a few days up to a few weeks. Or lastly you could apply the most challenging technique which is daytrading to enter and exit positions during the day.
The variety of investment strategies to choose from is very big. Therefore take your time to figure out the best choice for you so that you put the odds in your favor to be a successful investor and trader.
I invite you to keep up to date with my articles which cover a lot more details on successful investing. They can be found athttp://PensionMillionaire.com
From Sascha Goedel - Teaching Simple Strategies That Work
Article Source: http://EzineArticles.com/?expert=Sascha_Goedel
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