Don’t trade individual stocks — too unpredictable. Trade particular sector ETFs that you are familiar with. And limit the number to no more than 5. Have one of the 5 represent the broader market. Become very familiar with how they trade and how volatile each tends to be so you know what to expect. Look for ETFs that have a lower left to upper right chart pattern, and avoid ones with a chart pattern that is erratic.
But you have to have a strategy. Mine is to trade corrections. I buy in larger increments as the correction deepens, but sell when the recovery gets back to the starting point or a little above — don’t be greedy, get out when you have a decent profit and not more. You need to have a large low buy when the correction gets to the low point to make any real money.
The challenge is that you never will know in advance when the correction has bottomed, so you must buy at a set pace, say with each 10% decline — not before — and each buy lower is larger to lower your average cost.
You never will know in advance when the correction is about to bottom but you can get a bit of a tell from the VIX. A VIX in the mid 20s and above isn’t sustainable so you are probably close to the bottom.
Also, corrections in recent history have had a kind of time stamp to them. The drop is sharp but on a limited number of trading days. I find that 19 trading days is a tell for when the bottom may occur — 19 days from the previous high.
The above strategy will always work in a continuing bull market, as the corrections will always recovery. But in a true bear market, the above strategy can become a death spiral down, so one must assess whether a bear market has commenced. That’s difficult to do.
And yet even in a bear market, one gets very sharp bear market rallies that can be traded on the long side if one is nimble and you don’t hold too long.
You can’t be both an investor and a trader. You have to pick one or the other.
To be successful in the market, you can’t really be taught how to do it, but must find an approach that truly fits your particular temperament and outlook. You have to try different things and see what fits because under stress, if it doesn’t fit, you will cop out and end up losing big.
There are sites where you can set up a pretend account and trade like it’s the real market. Best to use those sites first to see whether your strategy has any merit. It is much nicer to lose play money than real money!
You have to get to the point where you see the entire trade beforehand, so that you know the entry point, what you are doing while you hold the trade, and the exit point. You know all of this before entering the trade. Most traders also employ protective stops to get out of a seriously losing trade. You have to determine if and how you will use protective stops.
It’s all too easy to lose money in the market, and actually quite difficult to make money consistently over time. Never forget that trading is a zero sum game, with winners and losers both — the guy on the other end of the trade is always trying to beat you and beat you badly.
Keep a diary of your trades and ask yourself after the trade is over, what you did wrong and what you did right, i.e., learn from your trades — don’t keep making the same mistakes.
Guard against overconfidence, especially after having a string of wins. Don’t allow yourself to get too confident with the market — it will devour you if you do.