By Markus Heitkoetter – Investors often look to experts and experienced traders for their predictions on how the market will trend. For example, I am often asked to predict where the Down Jones Index will be at any given time. The truth is, I have no idea how to answer these questions. Predictions on the market are like throwing a dart. Most traders would be thrilled if they could predict where the Dow will be just minutes from now, and, as the recent extreme fluctuations prove, no one knows when huge movements will occur.
What many day traders need to remember, however, is that successful trading does not require predictions. It requires a system to deal with the markets no matter what direction they are trending. I always tell traders the same thing: keep it simple! There are three simple rules to remember when trading that are better than any expert’s prediction.
First, buy when the market is going up, and sell when it is going down. I know this sounds overly simple, but too many investors forget to follow this very obvious advice. They may fall for concepts like “Dollar Cost Averaging” where you actually buy a stock even though it is falling. Although they may have read some persuasive defense of such a strategy, it goes against what should be obvious to everyone: you only make money if you own a stock and it is going up. When it is going sideways, or even going down, invest in a different stock or a different market altogether. Every day, you can find stocks that are going up, and profit depends on being able to find the ones that are rising now, not to predict which will go up in the future.
Second, know when to exit. Most traders stay too long in the market. Either they fail to take profits or they let their losses run too far. Both mistakes can be disastrous. You should know when to exit a trade even before you enter it. If you haven’t determined your acceptable loss and your target profit from the outset, then you aren’t yet prepared to trade. As soon as you are in a trade, place a stop loss order and a profit taking order. Good traders use a stop loss, but great traders use a profit target in order to maintain a profitable edge.
Third and finally, trade the right stock. The right stock, remember, is the one that is going up. This is where people usually want predictions. How else, they think, can you figure out which stock is going to improve? The fact is that there are a number of very easy tools you can use, not to guess the future, but to identify promising stocks. Use simple filters, and determine stocks that bounced back from an absolute or relative bottom. Do not try to pick bottoms or tops because it’s next to impossible. However, if you look for stocks that had been going down or sideways but are now moving up, you have a chance to catch a small move. The important thing is not to be greedy. You can make 25% per year by making just 5% on five different stocks. And it is of course much easier to make 5% on a stock than 25%.
With these three rules, you won’t need to depend on or even waste time looking for predictions. You simply apply each rule one at a time in a very careful and deliberate manner. First, learn to identify the direction of a stock. Then learn when to exit a stock. And then try to find or come up with a good filter to locate the right stock. Don’t try to do everything at once. Trading is not easy, but it can be simple. Don’t make it more complicated than it is. Plan your education, and take one step at a time. Learn something new every day, and you will be amazed how much you can learn in as little as a month.
About the Author
Markus Heitkoetter is the author of the international bestseller “The Complete Guide To Day Trading” and a professional day trading coach. For more free information on day trading visit his website http://www.rockwelltrading.com