Trading, at its core, is…
The internal buzz of using one’s intellectual capacity to devise ideas that generate profits.
Unfortunately, that buzz can quickly turn into agony if you don’t acquire the right skills to trade profitably.
So, what are the necessary skills for success in trading?
Let’s dive right in!☟
Reality Check: Books and Indicators Aren’t Everything
While reading countless books and exploring new indicators might provide marginal value, they aren’t the key to trading success.
Indicators offer a framework within an established process, but that’s about it.
Risk Management: The Secret to Trading Success
Contrary to popular belief, success in trading comes more from risk management than from forecasting abilities. Your edge predominantly comes from implementing trades that follow this simple logic:
• When losing, the losses are small compared to the multiples made when the trade goes right.
Easier said than done!
Overcoming your ego and arrogance is crucial in taking responsibility for your actions and PnL. This benefits both your trading results and your life in general.
A Practical Example: The Importance of Partial Profits
Let’s break down a hypothetical situation:
• You have an unrealized profit of $10,000.
• Instead of taking partial profit, you hope the asset will rise further.
• The asset’s value drops, and your profit plummets from 10,000 to 2,000.
In hindsight, this drama begins by not admitting a mistake.
What was that mistake?
Always take partial profits!
When you accept that you’ll never know the perfect entry and exit points, your trading becomes a much simpler game.
Average your way in and out to smooth the process and reduce the chances of bad luck.
Averaging out prevents situations like giving back most of a $10,000 trade, as mentioned in the example.
Options Strategies: Profit Protection Enhancers
Options offer useful techniques that anyone can learn to keep skin in the game while aiming for more profits and securing a significant chunk of your hard-earned money:
Protective Put: If you have a long position in a stock and want to guard your profits, buy a put option with a strike price close to the current market price.
Collar Strategy: A collar strategy involves buying a put option and selling a call option with the same expiration date but different strike prices.
Covered Call: If you have a long position in a stock and want to generate extra income, sell a call option with a strike price above the current market price.
Put Spread: A put spread involves buying a put option with a higher strike price and selling a put option with a lower strike price.
Your ego’s tendency to disrupt sound decision-making is the #1 enemy you must quiet as much as possible.
The first mistake rarely kills you. It’s the compounding effect of a series of mistakes that does.
And that’s our lesson on the key skills for successful trading!
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Thank you for making it this far!
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