This might seem like a simple question for a stock trader but take some time and really think it out. My definition of a trader is a someone who takes risk solely based on price and volume. My definition of an investor is someone who speculates based on the current price of a stock that it is a value compared to what it is “worth.”
The reason for taking risk in both of these instances will be vastly different. The risk parameters for each will be very different. The more crystal clear your business plan is in regard to defining an edge, risk and trade expectation the easier it will be for you to follow your plan flawlessly.
Sometimes it can just be a tweak here or there that can make a difference in a traders career. Last month I had a conversation with a trader who was struggling to make consistent money. As a matter of fact he was losing money steadily, his trading was all over the place.
We did an analysis of his P&L and I couldn’t believe what I saw, he traded over 100 stocks this month and we still have a week left in the month! One of the topics you will very rarely see in a trading book is to learn the personality of the stocks you are trading. Why you ask? Isn’t a chart set up just a chart set up? Well, yes and no.
One of the biggest secrets of making consistent money is understanding when to use more leverage. Contrary to rookie trader belief is trading the same share size every trade. When you learn the daily characteristics of how order flow is traded intraday you will know the scenarios to step up your size and just as important when to pull it back.
I told this trader to pick a sector or two and to pick 5 stocks he trades no matter what. So basically he was watching about 15 stocks for the entire month. His first reaction when I told him to do this was that he would be “too restricted.” I told him have faith.
I am happy to report this month he will take home a trading check but more importantly he is understanding how to run his trading business with confidence. He is focused.
By Mark Marchi