Rules for successful trading

You don’t need a university degree, but you definitely need a plan that you stick to.
Deciding on your take-profit and stop-loss levels is an important first step. The next is to avoid the temptation to go beyond those levels. Image: Brent Lewin, Bloomberg

As stocks like Apple hit new highs – the Covid pandemic notwithstanding – traders are pouring into online trading as a way to supplement their incomes.

The Nasdaq is trading at all-time highs and the Dow Jones Industrial Index is near all-time highs.

This might seem irrational given the devastation wrought by global lockdowns, but investors are betting that the world economy will stage an aggressive rebound.

Traders are continually on the hunt for volatility. For many years they plied their craft in the forex market, then volatility died in the post-Brexit world (though it has returned in recent weeks).

Rules: You need to be looking at a 2:1 ratio of wins to losses. In other words, look to make twice as much in profit as you are willing to lose. This means you need to determine what level of profit you are willing to take. This is known as a ‘take profit’ level, which can be preprogrammed into your trading account. At the same time, you should set a ‘stop loss’ level – which is the level at which you exit a trade should it go against you.

Why traders lose: They start fiddling with their take-profit and stop-loss levels. This is particularly true of trades that go against the trader. They tend to extend the stop-loss level in the hope that a losing trade will eventually reverse and turn profitable. The problem with this is that losing trades, left to run their course, can eventually wipe out your account. It’s better to acknowledge the loss and exit when it hits your stop-loss levels.

Educate yourself: CM Trading has a vast library of online training tools to show you how to properly set up a trade, and where to set your take-profit and stop-loss levels.

Copy trading: For those who don’t have the time and inclination to study trading, ‘copy trading’ is an option. This allows you to mimic the trades of successful and experienced traders. This is a free service at CM Trading, and you can review the history and track record of a variety of traders and their strategies, and then decide if this is for you. Once you decide to jump in, the trades can be fully automated.

Which is better – forex, indices, equities, commodities, cryptos? There’s no easy answer to this. Each market has different dynamics. Gold and precious metals have been roaring ahead this year, oil has been subdued (though with pockets of volatility, which traders love), and equities have recovered strongly since the Covid crash in March. There has been an exceptional opportunity for profits in each of these asset classes. Bitcoin and other cryptos have also been on a magnificent ride and are now seen as safe haven assets at a time of reckless government financial behaviour.

How much do I need to start trading? At CM Trading, you need $250 (about R4 100) to open an account. This is the minimum, but it would be better to start with $1 000-$2 000, which gives you sufficient headroom to grow.

Open an account with a regulated broker: One of the benefits of choosing an SA-based broker is that it falls under the Financial Sector Conduct Authority (FSCA) which provides a level of comfort and regulatory oversight for South Africans. CM Trading is regulated by the FSCA.

Warren Buffet has exited many of his stocks and invested heavily in Barrick Gold. Is this a good time to buy gold? Buffett is backing Barrick because he saw an opportunity for growth in this particular gold stock. That said, a good argument can be made to include gold as a commodity in any portfolio as a hedge against inflation and uncertainty.

Is it true that most traders lose? There is some European research to suggest that most traders do lose. What’s more interesting is to explore the reasons for this. Those who lose tend to deviate from their own trading plan (by, for example, letting their losses run, and taking profits too quickly). This is more of a lack of experience. On the other hand, there are traders who have been around 20 and even 30 years, learning from their mistakes and rather consistently making profits. No one is going to get it right all the time. Stick to your trading plan, exit your losing trades timeously (at your predetermined stop-loss level) and aim to make double what you are willing to lose on a trade.

Brought to you by CM Trading.

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85% of traders who use gearing lose their capital within the first 12 months. Of those who remain, 85% lose their capital in the second 12 months. Coincidentally, 80% of new companies and businesses close their doors within 3 years. The money-making business is not an easy one.

The statistics are valid across international demographics and not confined to South Africa alone. If we determine the percentage of farmers who are profitable, professional golfers to the total amount of players, successful surgeons as a percentage of all doctors and professional rugby players relative to all players, then we will find that less than 5% of participants are successful. We have a running experiment in South Africa with the “emerging” farmers and land redistribution. Less than 5% of beneficiaries are able to survive for more than 5 years.

The same stats are valid for traders. Not because traders are bad, but because profitable trading is hard. Anybody can win the lotto, but nobody has won the lotto twice. Trading is about consistency and consistency is about psychology. Therefore, to be able to trade successfully, you have to know your enemy (other traders) and you have to know yourself (psychology). If you know yourself and you know the market, you will win every skirmish, and you will eventually win the war. A successful trader is someone who has been executing the same strategy for 20 years and has some decent capital appreciation to show for it.

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” ― Sun Tzu, The Art of War

A trader who uses gearing is dancing with the devil. On the trading platform, you are at a party where all the other party-goers are scheming to steal your purse, and you are scheming to steal theirs. The interaction between buyers and sellers is about territory and assets, the same as war. It is not a game. It is a matter of life and death. Those who enter this battleground unprepared will lose. This is the nature of the beast.

Investment is different from trading insofar as the gearing is concerned. Investors have time on their side, while traders are short of time, and time is the best fund manager. There is an inverse relationship between the amount of gearing and the lifespan of trading capital. Gearing is like methamphetamine, enticing, but deadly.

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