The only thing that can be controlled in the financial markets is the costs, risks and execution of the trading strategy. Minimizing costs and risks in conjunction with high-quality execution of the rules of a profitable mechanical trading strategy is the key to success. If you are a novice trader who wants to become successful, then follow these tips from an experienced trader.
Use a discount broker
For each transaction, the trader pays a commission to the broker and the exchange. Regardless of whether it is a profitable trade or not. Reduce commission costs as much as possible. Your survival depends on it. The lower the commission, the higher the probability of a trader’s survival.
Today, the brokerage services market is full of various brokers, including discount ones. They all compete for the right to be your market intermediary. Take advantage of this opportunity and choose a discount broker with minimum costs not at the expense of quality and reliability.
Trade liquid instruments
The large trading involvement of traders, investors and other market participants makes the instrument liquid. The more liquid the instrument, the easier it is to buy or sell at the current market price. Liquidity reduces spreads and slippage.
What is liquid for a long-term trader can be illiquid for a short-term one. The longer-term trading, the less liquid instruments can be traded by expanding the list of trading instruments. Day traders and scalpers can only trade a limited set of very liquid instruments.
Trade during periods of low volatility
It is much better to enter and exit the market during periods of calm, when the volatility of the instrument being traded is relatively low. With low volatility, spreads and slippage are minimal. Of course, this does not always work, but you should strive for this.
Entering the market in a period of low volatility allows you to buy or shortly sell more assets at the same risk. If, after opening a trade, the market moves in your direction with increasing volatility, then the trade may close with great profit with low risk.
Use limit orders
To control slippage, use limit orders instead of market orders. The problem is that when prices go in the direction of the trader, the limit order may not be fulfilled. However, when prices go against, the limit order is always executed.
To increase the likelihood of execution of a limit order, place it at a slightly worse price. For example, if the current ask price of the instrument is $10, then place a buy limit order at a price of $10.02. In the worst case, you will overpay 2 cents, but the probability of order execution is significantly increased.
Trade long term
Long-term trading is more comfortable, less stressful for a trader and safer for capital. The market at long-term time intervals is more predictable, trending and less noisy.
The longer the lifetime of the average trade, the greater the price movement a trader can take. A big price move is a big potential profit per trade. Against the background of large profits, costs in the form of commissions, slippage and spreads become less significant and dangerous.
Use mechanical trading strategy
Mechanical trading strategies have objective rules that prevent the trader from making subjective decisions. These rules can be entered into a computer and tested for robustness using historical price data. This eliminates the risk of trading an unverified strategy that can bring only losses.
A scientifically sound, statistically significant, thoroughly tested on historical price data strategy is much better than intuitive trading. Another advantage of mechanical trading strategies in their automation.
Use automation and trading robots
By manually trading a mechanical strategy, you can violate its rules by skipping trades, put too much risk on a trade, or just physically fail to send orders, getting trades at a worse price. This can be avoided by trading robots that automatically follow the rules of the trading strategy.
Since mechanical strategy has objective formalized rules, a trading robot can be created on their basis. The advantage of trading robots is speed, flexibility and impartial adherence to trading rules without the intervention of the trader.
Manage risk and capital wisely
Risk management is required to reduce the impact of the outcome of a single trade on trading capital, increase the likelihood of profit and reduce the dependence of trades on each other.
If the trade is unprofitable, then it must be insignificant for capital to remain in the game and enter into other trades. If profitable, then it should not greatly increase capital. Growth and drawdown of capital should be smooth and low volatile.
Risk management looks something like this:
- Not more than 2% of cash per trade;
- Not more than 8% of cash per the instrument;
- Not more than 12% of cash per correlating instruments;
- Not more than 20% of cash per non-correlating instruments;
- Not more than 24% of cash per the direction of the transaction, long or short;
- For every 10% loss of capital, reduce the risk in the transaction by 20%.
Also, refuse to use leverage or reduce its use to a minimum.
Search and test new trading ideas
Having found and trading profitable trading strategies, do not relax and continue to look for new profitable ideas and strategies. Markets are constantly changing and trading strategies that work today can stop working tomorrow. Only flexible and assiduous traders who do not stop there survive.
Experienced successful traders know this and always take the time to search and research. It is not necessary to look for something fundamentally new, it is quite possible to modernize current trading strategies by adding something new to them and removing the old one.
Do not read or consider news
One of the postulates of technical analysis states that the price takes into account everything. This means that all news events, the actions of market participants and many other fundamental variables are already taken into account in the price. Therefore, always concentrate on the price.
Tracking news takes time, disperses concentration and harms trader’s trade. Apart from the fact that the news is taken into account by the price and there is no sense in reading them, each trader can interpret these news in his own way. For one trader, the news will seem a strong signal to buy, for another – for sell, and the third trader will consider the news insignificant and prefer to stay out of the market.
The only exception is the publication of truly important macro news, strongly affecting the markets and increasing market volatility. During periods of such news release, it is better to refrain from trading, waiting for a storm outside the market.