This post has ideas from the book Super Trader by Van K. Tharp.
We spend years getting a good education to become a professional, however, we treat investing and trading as if anyone could do it. You cannot build a bridge without training, however it is easy to open a trading account without any training. The result is usually disastrous.
To become a good investor/trader, you need to do the following:
- You have to treat trading/investing like a business. You have to prepare for it the way you would for a business.
- You need to a business plan – a working document to guide your trading/investing.
- You need to follow the rules you set for your investing/trading. Not following the rules leads to mistakes
- You need to follow regular procedures to make sure you are following your rules and not making any mistakes.
- You need to have a system for investing/trading and you should have tested it.
- You need to know how your system performs in different kinds of markets.
- You need to know what kind of market we are in and what results you will expect from your system in such a market.
- You need to have a plan for when you will exit an investment.
- You need to exit your investment when your investing system says so and not procrastinate.
- You need to have specific goals for your trading/investing.
- You need to have a position sizing algorithm( which in some cases might be asset allocation).
- You need to understand the importance of the above.
- You need to understand that you create your own investment results through your thinking and beliefs.
- You need to accept responsibility for your investment results
- You need to work regularly on yourself to make sure you follow the above points.
You need to understand the five steps to consistent profits:
1. Working on yourself:
- Everything you do, say, think or feel is shaped by your beliefs. Your reality is shaped by your beliefs.
- You do not trade the markets. You trade your beliefs about the market.
- Examine your beliefs to see if they are useful. If they are not useful, find beliefs that are useful.
- As a first step, transform at least five limiting beliefs of your life.
2. Developing a working business plan: The business plan includes working on yourself. It includes the following:
- Thorough inventory of yourself
- Your assessment of the big picture: stock market, strongest and weakest areas among various asset classes and investment options, strength of the dollar/your investment currency, inflation or deflation
- Business systems that need to be put in place
- Strategies that fit the big picture and that work when conditions change.
- A worst case contingency plan
3. Develop trading strategies that work in different conditions
Van Tharp does this as follows:
- Since 1950, the average change over 13 weeks(absolute value) is 5.53%
- Since 1950, the 13 week average true range(ATR) as a percentage of the close has averaged around 2.87%
The different types of markets then can be classified as shown below:
However if you do not believe in this type of analysis you can also use asset allocation as a strategy or something else that will work for all types of markets.
4. Learn how to meet your trading objectives
The best way for anyone wanting consistent profits is to develop a strategy with a positive expectancy and then develop a position sizing strategy that maximise the probability of meeting one’s goals.
5. Taking steps to decrease your mistakes
Following your rules is correct. Not following your rules is a mistake. This basically means you should be disciplined in your trading and continue to work on yourself.