8 Principles to Follow for Successful Trading

We have spent years analyzing common traits of exceptionally successful traders. Most have these 8 habits that, when combined, can turn dreams into reality. We have further inserted some key points from one of the best trading/investment books ever published, Reminiscences of a Stock Operator by Edwin Lefevre (1993,1994 Wiley). To make the most of the app, Stock Arbitrage Trader, we strongly encourage you to follow these 8 principles:

1- Do not trade very frequently especially if you do not have a winning system. Bulls can make money, bears can make money, but it’s the pigs that usually get slaughtered in stock markets. Do not try to take home some money every day. Be patient. Of course having a stop-loss point for each trade is essential. However, if you determine your stop-loss at a very close point to where you take your position, you will likely lose money on a potentially winning trade. Do not chase the news. Especially in sideways market trends, you will be wiped out if you trade too frequently. When using the Stock Arbitrage Trader app, if you are bullish and long on a stock wait until the system changes its recommendation to sell.

2- Never argue with the market; never lose temper over the market direction. Never argue with what you see. Getting sore at the outcome does not get you anywhere. If your timing is bad and you lose money on a trade, limit your loss when the price hits your stop. Analyze the overall conditions (check the market direction forecast on the Market Pulse page). Add your own analysis. If favorable conditions align, take your position. In bull markets, pick your positions wisely and do not rush. There is always plenty of time to buy. Be faster when generic conditions change (again check market forecast on the app) or when you think it is time to sell.

3- Try to anticipate the next major move. Don’t be concerned about the next few ticks. Instead, think short-term trends over the next few days, weeks, or even a month. If the trend is up, there will be down days, or vice versa. You can’t be right all the time, but you should be following the steps of the generic trend. The arbitrage model’s market direction forecast has about a 70% success rate, you can use that or use your own judgment to determine the generic market trend and act accordingly.

4- Learn your lessons well. You will not win ten out of ten times out of your investments/positions/bets. When you are right and make money that’s great, keep on doing that. However, with your positions losing money, you also must learn what not to do. Begin to learn what to do in order to win. Do not push the limits of your winning system which might go broke. Similarly, do not test your patience when losing. Try to analyze your own psychology when trading.

5- Closing a winning position too soon is as bad as keeping your loss for too long. If you do not sit tight and make enough money on your winning trades, you will not be able to make enough to cover your losses from your bad trades. Don’t get stuck in individual fluctuations. As Larry Livingston expresses in Reminiscences of a Stock Operator ”It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”.

6- Do not average down when buying or average up when selling. Pick ideas from the Stock Arbitrage trader app or on your own. Check technical levels using charts. You might also review company fundamentals and perform additional analyses. Then, size up the generic market trend, determine your stop-loss, and finally execute the trade. Do not average down when buying and also do not average up when selling. Averaging your costs down might look logical but it is actually equal to trying to catch a falling knife. If your judgment is wrong and the market has entered a down trend you will be losing more money when trying to average down your costs.

7- Never buy at the bottom and never sell at the top. Nobody, not even the best algorithms, can predict the precise bottom and top of any trend. Always look out for confirmations of any trend. These might include market direction forecast changes of the Stock Arbitrage Trader app, 3-days-in-a-row up or down closes of the indexes, and technical levels; especially breaking points. But never jump into a trade without these confirmations and never hope for reversals.

8- Fear and hope at the right time. When the market goes against an inexperienced trader he/she hopes that particular day will be the last day of that behavior. When the market does go her/his way, she/he becomes fearful that the next day will take away all the profit and gets out too soon. A successful trader manages these conflicting feelings differently. You should become fearful when the position starts to lose money and hopeful when riding your gains. This is easier said than done, but very true.

Do you follow these principles? Other principles perhaps? What works best for you?

6 Responses to 8 Principles to Follow for Successful Trading
  1. ralph mahtesian Reply

    using your app.its says on 8 principles for successful trading on no. 1 if your bullish on a stock buy when the app says sell then theres other stocks. that say strong buy. please explain . thank you

    • missingSTEP Reply

      This question is about the difference between “strong buy” and “buy” recommendations, correct? Strong buy is a recommendation about stocks that are statistically a little more diverted from their means than regular buys. In short, they’re supposed to be a little cheaper than regular buys. However, there is really not much difference between them, meaning that statistically speaking both are bullish recommendations. The first bullet in the 8 Principles note is about “patience”: The app might say “strong buy” in the beginning for a particular stock, then might signal only “buy” for a couple of days, and might even signal “hold” for a while; but we encourage you to stick your position (long position in this case) as long as it starts to signal “sell” or “strong sell” (unless of course it turns out to be a bad call and the price hits the stop-loss limit of the investor).

  2. Mika Reply

    Below is the first page of my small unique book “The small stock trader”:

    Successful stock trading requires almost the same traits as most other creative and competitive endeavors. Stock trading is not about having a high IQ, an MBA, numerical or software skills, macroeconomics knowledge, or some magic technical indicators. It is more about managing your stock trading plan, mind, and capital with an efficient use of your little time, money, and abilities/skills. Even 300 Spartans cannot beat you if you have the following:

    • Passion
    • Understanding of psychology
    • Focus
    • Hard work
    • Unique stock trading plan
    • Independent thinking
    • Zen-like simplicity
    • Open-minded flexibility
    • Patience and timing
    • Discipline
    • Risk management
    • A little luck

    If you look carefully at these items, you will also notice that a successful small stock trader is more of a personality and practice than just some technical knowledge. However, even if you have all of the above traits, humility is also important. Do not allow your ego get overconfident, as anything can happen in the stock market. As in poker, in relationships, or in life, you may follow all the rules and do all the right things but still lose some battles. Nevertheless, you can still win the war if you have the above-mentioned traits. Furthermore, there are also a few more items that we could add to the above list, such as having a super self-knowledge and selfesteem, knowing and respecting the other players, secrecy, knowing what you want and never giving up as you strive to achieve it, focus on a single activity/market without multitasking, creativity, an analytical mind to calculate the risks and probabilities, taking a few parts of the best strategies, learning from your mistakes and from a few best players, honesty, good observational skills and intuition to act quickly, confident courage to take well-calculated risks, Zen-like inner peace and continuous self-improvement, being a unique individual, and eventually efficiently using your little time, money and abilities/skills.

    I hope the above page of my small book was a little helpful!
    Mika (author of “The small stock trader”)

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