5 Ways to Become a More Profitable Trader
As an experienced trader, you already know the notion of getting rich quick is nothing more than a myth.
Stuart Lane, CEO at Trade Nation, offers his advice to veteran traders looking to take their investment portfolios to new heights.
It takes time, commitment and passion to build an effective trading plan that results in positive outcomes. However, this is certainly not a linear journey. There are always ways to improve your approach to trading, with endless strategies and insights to explore and perhaps experiment with.
If the time has come to take your trades to the next level, consider these five pointers followed by some of the most successful investors of all time.
1. Beware of the unknown
You should only consider investing in businesses you can easily analyse. If you don’t understand a company inside out, you won’t know how it makes money and whether it will keep doing so going forward. These details are crucial to project performance with any confidence. This is why, for example, Warren Buffett largely avoids investing in technology stocks — a sector he doesn’t keenly understand. He shied away from the dot-com bubble of the early 2000s, and although he was chastised by financial analysts and the press for doing so, he ultimately had the last laugh when the bubble burst. This demonstrates the importance of prioritising a simple and understandable business model over fads that left investors expecting unrealistic returns.
2. Look forward
Rather than examining the recent past to predict the future, think about possible disruptions that could alter the outlook of an industry or stock group for the foreseeable, such as broad social, economic, and political variables. This approach is famously championed by George Soros. For instance, even though there was huge pessimism around Japan after the 2011 Fukushima disaster, his firm saw the significance of Shinzo Abe taking leadership of the Liberal Democratic Party in 2012. However, the market overlooked this while Soros was already in position when the Yen fell and Japanese equities took off as a result of Abe becoming Prime Minister. It may feel daunting to take a different approach to the majority, but if you’re able to anticipate a change that others didn’t expect, this won’t be reflected in security prices and therefore offers an opportunity to profit handsomely.
3. Diversify — but not for the sake of it
You probably already understand just how important diversification is for risk management, but always do so with due consideration. Follow Peter Lynch’s example by striving to build a diverse portfolio that only contains the best possible stocks. He strongly believed in spreading his investment between different sectors, company sizes and growth potentials, hence why the Magellan Fund always had over 1,000 individual stock positions during his time there. However, he would never diversify just to reduce risk — he called this “diworseification”. This means that you shouldn’t purchase an energy stock for the sake of increasing your exposure to the industry. Only do this if the stock is worth owning.
4. Buy and hold
It can be scary to hold a position when the markets become volatile, but this is exactly what you need to do according to the late Jack Bogle. “Stay the course. Don’t let these changes in the market, even the big one [like the financial crisis] … change your mind and never, never, never be in or out of the market. Always be in at a certain level,” he said at CNBC’s Power Lunch in 2018, adding that short-term betting is “not a good way to go”. Remember that not all market moves will be significant, and selling preemptively usually means you won’t have particularly good results.
5. Time your trades to perfection
There’s no use in speculating correctly if you mistime your position. In fact, Jesse Livermore believed that unless you get both the direction and the timing of your trade correct, then you’re wrong in practice. “I didn’t wait to determine whether or not the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape-reading I didn’t do it,” he once said following a significant loss. “That is how I came to learn that even when one is properly bearish at the very beginning of a bear market it is well not to begin selling in bulk until there is no danger of the engine back-firing.” Therefore, avoid acting on instinct and wait for the market to confirm a thesis, then make your trade as quickly as possible.