Follow these rules – memorize them, internalize them and remain faithful to them. It will pay you back for years to come.
This is the most important rule when learning to trade. Start small. I’ll say it again. Start small. I don’t care how much capital you have to your name. Start small. – Why? – Because it takes time to understand trading, reading stock charts, and more importantly it takes time to get used to managing your emotions – the excitement, the greed and the fear. The last thing you need is for your emotions to dominate your decision making, which will, at best significantly lengthen your journey to consistent profits, but, at worst, scar you and knock you out of the game for good. Start small. When you first open a trading account or first trade options, only allocate a relatively small sum, even if you plan to follow and copy the trade alerts. This may sound a trivial amount, but the aim at the beginning is not to make a fortune.
The aim when learning to trade is to:
- learn to identify good chart set-ups
- practice selecting an appropriate option as regards strike price and expiry month
- practice entering and exiting trades at the right levels
- practice banking profits before your greed gets the better of you
- practice closing at break even profits that you previously had but didn’t close out when you should have
- practice stopping out when a setup fails
- learning not to invest too much in any one position
- learning to be patient when a trade is taking time to play out
By practising with a small sum you will master the art of trading far quicker, without your emotions getting in the way. As you grow in confidence, and more importantly your account grows, you can then gradually put more money in your account. If your position size is too big, especially at the beginning, you will be too fearful and will close out positions prematurely, triggering unnecessary losses, only then to see the trade hit your original target – without you. I wish I had this advice when I started out! How many times early in my trading career I would do a big position (not realising it was big at the time), and it would be too fearful to endure so I’d chicken out of the trade – completely unnecessarily triggering a loss. Again, start small. If you can turn a small trading account into consistent profits over the course of the year, then you can do the same with a bigger account. See the FAQ section to see guidance on how long it takes to become confident and consistently profitable.
Enter a trade only when there is a set-up there
Do not force trades. Do not kid yourself into thinking there is a setup there when there isn’t one. Take the best setups only. But, here’s something to be aware of. When you are new to trading, you won’t quite know what a good trade set-up is. But, as you watch the trade alert videos, you will notice that the different set-ups repeat themselves time after time. Be a stickler for entering good set-ups only.
Turn off the financial news channels
Most, if not all of the time the analysts or hedge funds on TV do not make accurate calls. They may have hidden agendas knowing the public is watching and ready to follow every move they ‘recommend’. Don’t listen to them. Do not trust the mass media. Learn to trust the charts. The charts don’t lie. You just have to learn how to read them accurately – but then that is why you are here at Trading with Zach
Trading is a marathon, not a sprint
On average, over the course of the year, we will enter around 70 swing trades. There is plenty of opportunity to profit from the markets, therefore never ever overload yourself in any one position – there is simply no need to. With the risk of losing 100% in any one position trading options, you must never over expose your trading account. As a guide 5-10% in any one position is sensible. At Trading with Zach, we are walking away with profits over 70%* of the time, and sometimes with multiple hundreds of percent in profits on individual trades. There should be no pressure to invest too much in any one position. At times, your account will grow quickly and sometimes the pace will be much slower, but you must not force trades. Remember, there is always another trade around the corner.
* This can fluctuate throughout the year and is a long term average. See our Track Record for the latest stats.
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Patience is the key in this business. When volatility levels are high, then the pace of trades is faster, and bigger. But when markets are slower (the majority of the time), it takes longer for trades to play out. Therefore bear in mind that over the course of the year, the market will move in different phases. When I was new, I didn’t appreciate this fact, and so naively anticipated that trades play out within a matter of days every time. You can imagine how I fell flat on my face when trades failed to play out quickly when my options expired worthless. Always give trades time to play out – do not buy the near term expiring options… which bring us to our next point…
Give your options time
When trading options, give the trade time to play out, at least 2-3 months – or even longer. Do not buy the nearest term expiry in the ‘hope’ that you’ll make thousands of percent. Most of the time you’ll lose 100% – something to definitely avoid. Having said that, there are rare opportunities when you can score big with the near term expiry, but they only occur when the volatility is higher, and we will capture them when those opportunities occur – the gains can be spectacular, but you must use a small position as the risk is higher.
Don’t hang on
Do not hang on to or ‘get married’ to a position thinking it is going to the moon. It is always best to bank profits when a stock makes an appreciable move. If you hang on for too long, there is a high risk that the position then goes against you, and you lose the profit you had – and even worse, a profitable position becomes a losing position. (Yes, been there done that many times in my early days).
Close the trade at break even
Once a position is in reasonable profit, if you did not close the trade, make sure you close out at break even if the position begins to go against you. Never let a profitable position become a losing position. Just admit you didn’t bank the profit – close the trade at break even, get over it, and move on. Sometimes it just happens that you didn’t bank a profit – far better to walk away flat than a profitable position turning into a losing position.
Don’t take a trade just to ‘see if it works’ or test something out – you will only lose. One of the reasons why it took me so long to become profitable was that I tried out too many things with real money, and I paid the price for that. Only take the best set ups. When you’re a newbie (we were ALL newbie traders once upon a time), you won’t know what a good set up is, but as your experience builds, you will learn to recognise ‘a good set-up’. If you want to test something out, just watch the chart everyday unfold and see if it did what you thought it would do. Do this as often as necessary, (I myself still do this all the time to this very day) but do not put your money on the line to ‘experiment’.
Never revenge trade
Don’t go back to the same stock you made a loss on… unless there is a set-up there.
Be a stickler for getting the best entry price. When I was new, I was always concerned I’d miss a trade, I’d enter a position after it already started moving. Never chase – entry price is everything. If a trade goes without you – don’t worry. There is always another trade!
Get out before the top
Remember, your job is not to nail the exact bottom or top in a stock. For example, if you aim to sell right at the top at the ask price, your exit order may not get filled, and you’d be the last one holding the bag when it drops. Aim to get out before the actual top – sell into strength so that you get filled at the best price… the ask – even thought its not the actual top. Remember – your job is to catch moves which yield you profit consistently, and where the risk/reward ratio makes sense. Nobody cares whether you entered at the exact low or exited right at the high. Make this your aim each time you close a trade, and you’ll profit time after time.
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