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“THE HEDGE FUND
Habit #1: See the destination before you start trading
First of all, you need to have everything in place before you take every trade.
By this I mean you'll need to know what markets you're planning to buy or sell, the strategy you’ll use to help find your entry and exit signals and the rules you’ll follow to maximise your winners and cut your losses.
This way each day you trade, you'll have a complete plan to follow where you'll know what to expect without any nasty surprises.
For me, every trading day I go through the top 40 companies listed on the JSE to see if a trade has lined up according to my break out strategy…
Then I place my exit level at a place where I don’t risk more than 2% per trade. I then place my reward level in a way that if the trade goes for me, I know I’ll bank a 4% return per trade.
Once you’ve placed your entry and exit levels, you then let the market take over.
The best-case situation is you’ll bank a 4% return and the worst-case situation, you’ll lose just 2% of your portfolio.
Make sure you get into the habit of knowing what the best and worst-case situations are before you even place your first trade.
By risking less than what you'll gain, even with a 50% win rate you'll end up more profitable in the long term.
Habit #2: Understand your numbers
There are thousands of markets, brokers and instruments you can choose from.
No matter what you choose, you'll need to make sure you understand these three important numbers before you place a trade.
Note: I mainly trade CFDs on shares, so I focus on these three important numbers.
1. Share Market Cap
The market should be large, reputable and have over five years of growth and history of consistent dividends.
HINT: You should only look at companies that have a market cap of over R2 billion.
These are the blue chips of the JSE which are least likely to go bankrupt, liquidate or delist.
2. Number of shares traded per day
You should only look at stocks that trade over 500 thousand shares each day.
This way you'll know two important things.
First, you'll know you won’t need to worry about the market jumping 5% to 10% up or down in a day, which can force you out of your position for an unnecessary loss.
And second, you won't have to worry about paying exorbitant costs because of the large spread between the bid and offer of the share.
3. Costs per trade
With every trade you take, you'll need to understand the different costs you'll pay.
As each broker is different you'll need to know the commissions, platform and trading costs.
No broker should charge you more than 0.50% commission – If they are they’re ripping you off. You can look at our recommended brokers when you join either Red Hot Storm Trader
or Pickpocket Trader.
When you get into the habit of knowing these three numbers, you're less likely to experience nasty surprises when you take a trade.
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Habit 3: Choose who you listen and learn from carefully
Unless you want to destroy your account, you should be very careful with the advice you take and the information you learn from.
The internet is full of inexperienced traders pretending to be experts in the markets, when they have no clue.
Just because it's on the internet doesn't make it true, insightful and helpful.
Most times you'll find they're either trying to get attention, make money off things they don't know how to deliver and they actually believe their own BS.
Here are 6 red flags to watch out for…
1. A broker/trader with less than 5 years’ experience offering advice.
2. A consistent track record – if they only show the last three trades and no history of past performance spanning at least 2 years - Avoid!
3. They profess to have a 90-100% win rate.
4. They ask for money the second you enter their website
5. They don't reveal any proof of their strategy or track record
6. They have no reviews or testimonials
7. There are no contact details or money back guarantees on any of their products or services.
Look out for these red flags before you take someone's advice.
I've been in the industry for 17 years and I can only show you what I've learnt from and the mistakes I've made so you don't have to.
Three habits down four to go. Keep reading Trading Tips as next week I'll finish off with four more trading habits of highly effective traders.
“Wisdom yields Wealth”