As the year draws to a close, many traders are already looking ahead to 2016. The new-year brings with it hope for change, and with that change comes a clean slate in which to refocus your goals and priorities. The changing of the calendar should also compel you to reflect on the shortcomings of the previous 12 months so that you don’t repeat the same mistakes. In the world of trading, where real money is on the line, mistakes can be especially costly.
In the following article we present traders with a five-point game plan for success in 2016. If you’re looking to start the year off right, reflect on these points and begin to think about changes you can make immediately.
- Identify your risk tolerance
In the world of financial trading, success is impossible with risk management – the practice of evaluating financial risks with the aim of minimizing or avoiding uncertainty in decision-making.[1] What’s the maximum loss you’re willing to assume? What’s the biggest amount of capital you’re willing to allocate to one trade? These are essential questions you need to answer next year, as they will form the basis of your risk management strategy.
Remember, nobody wins 100% of the trades they make. By identifying your risk tolerance and setting up a strategy accordingly, you may avoid letting losses run.
- Define your trading plan
The Ancient Greek maxim “know thyself” applies very succinctly to trading. After all, nobody knows your situation, personality and risk tolerance better than you do. In defining your trading plan, you must identify which markets, assets and trading hours work best for you. This may help you identify which trading strategy is most likely to help you succeed.
In general, you are most likely to fall into one of two camps: day trading (the act of buying and selling securities based on short-term movements) and buy-and-hold trading (the act of buying and selling securities over the long-term).[2] Each of these two camps has a variety of strategies that you can apply.
- Quantify your goals
In order to be truly successful at trading (or anything else in life), your goals must be quantifiable. One of the best ways to do that is to apply the S.M.A.R.T criteria, which states that every goal should be Specific, Measurable, Attainable, Realistic and Timely. The S.M.A.R.T criteria helps you answer the six “W” questions related to your goals (who, what, where, when, which and why of your particular action). Start by asking yourself how much money you wish to earn next year and what steps you may take to get there. This might help you establish a realistic timeframe, identify requirements and constraints and uncover your specific purpose for achieving that goal.[3]
- Do your homework
The most successful traders are the most informed traders, and the most informed traders are those who do whatever it takes to learn about the markets. Although luck is sometimes involved in trading, long-term success requires deliberate action. In order to start 2016 on the right foot, brush up on your technical analysis and understand why certain economic and financial indicators impact the markets.
If you truly want to be a master trader, apply the S.M.A.R.T criteria in step 3 to increasing your knowledge. By doing so, you’re setting yourself for success year after year.
- Check emotions at the door (for real this time)
Psychology is one of the most critical aspects of trading; the inability to master it is also one of the leading culprits of failure. Developing your trading psychology – the ability to master your emotions, especially fear and greed, while trading – will help you form good habits and avoid the mind traps that end up costing you.
Unfortunately, managing your emotions when there’s real money on the line isn’t easy. That’s why increasing your market knowledge, identifying your risk threshold and sticking to a clear strategy (steps 1 through to 4) may help you develop the mindset needed to master trading psychology.
As the new-year begins, start applying steps 1 through 4 while being mindful of number 5. Ultimately, they may all lead you to becoming a more rational, confident trader.
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[1] Risk Management. Investopedia.
[2] Kristina Zucchi. “4 Common Active Trading Strategies.” Investopedia.
[3] Top Achievement. Creating S.M.A.R.T. Goals.
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