If you’re an online trader who plans to level up their strategies this year, it’ll take much more than persistence and determination. If you want to see favorable results in the long run, you can’t rely on luck, intuition, or guesswork. Rather, you’ll need to build positive trading habits that improve your ability to read the market, make better gains, and cut back on losses.
The Best Trading Habits to Adopt in 2024
Here are some of the best trading habits to adopt in 2024:
- Let Winning Trades Run
- Use Stop-Loss Orders
- Stay On Top Of Trends (But Not All Of Them)
- Start Small To Build Confidence
- Practice Discipline and Have Patience
- Don’t Let Fear Control Your Trades
- Avoid Overtrading
- Backtest Your System
- Cut Your Losses and Move On
- Learn From Your Mistakes
Let Winning Trades Run
Ask any expert trader about the biggest problem that new traders face, and the answer is likely ‘not knowing when to hold on and let go.’ This leads to major issues such as holding onto losing trades and cutting profits too soon. As a new trader, you may have asked yourself whether to let the current trade run or to just take profit as soon as you’re above breaking even. Perhaps there were instances when taking profit early on proved to be a wise decision. However, it’s possible that there were times when you regretted closing too quickly.
Traders tend to cut profits early when they:
- don’t have clear profit targets beyond breaking even,
- have a low-risk tolerance,
- aren’t confident in their trading abilities.
Sure, it’s tempting to lock in your profits instead of risking the possibility of losing them, but it’s not a great strategy in the long term. Instead, you should leave a positive position open until they reach your predetermined profit target. Then, only close your position if it’s time to take profits. Speaking of which, you should have a pre-established level for making a profit. Being too greedy could end up costing you.
Use Stop-Loss Orders
Trading is about managing risks as much as it is about making profits. Therefore, risk assessment and management are vital to long-term success. When building a risk management strategy, you’ll need to consider factors like how much to invest, whether or not to take leverage, and, most important of all, setting stop-loss orders.
When you set a stop-loss order, the broker buys or sells the security once it reaches a pre-specified price level. The purpose of a stop-loss order is to limit your losses on a specific position without having to monitor how the stock is constantly performing. Plus, they cost nothing to set up and protect you from emotional bias. Over time, you may develop a false hope that some securities may start performing well – even though the data shows otherwise. And when you use a trailing stop, a stop-loss order is an effective way to lock in profits. It does this by trailing the price as it moves up or down, giving you the opportunity to benefit from continued momentum.
Stay On Top Of Trends (But Not All Of Them)
No matter what assets you’re trading, financial markets are constantly evolving and changing. Consequently, traders should know how to interpret specific trends and use them to their advantage. Many seasoned traders argue that keeping up with current market trends can help you spot new opportunities that other people don’t recognize.
On the other hand, some may argue that keeping up with current trends is a bad idea because it can cause you to develop a herd mentality. So, what do you do? The best option is to carefully choose what sources of data you follow. If you spot a certain trend, make sure to see if the data supports it rather than allowing it to influence your opinions of the market. It can make the difference between finding a real opportunity or falling for the hype surrounding a specific market.
Start Small To Build Confidence
Being a successful trader isn’t about raking in significant profits but rather making sure that you don’t fail. It’s not necessary that each position results in jaw-dropping returns; in fact, only focusing on huge profits from the beginning puts you on the fast track to failure. Making smaller gains over time can increase your confidence, improve your portfolio, and enhance your skills until you’re ready to make bigger trades.
An added benefit of making small trades is that it’s an effective method to live-test your strategies. As long as you’re limiting losses and making small returns, you’re on track toward building habits that can bring about bigger profits.
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Practice Discipline and Have Patience
Letting your emotions control you is one of the biggest mistakes you can make as a trader. That’s why becoming more disciplined should be on the list of trading habits you should develop in 2024. When you’re disciplined, you’re more likely to stick to a predetermined plan. This can prevent you from making impulsive trades and losing money.
Discipline can also help you be consistent in your trading approach – as opposed to adopting a different one each time you trade. While there’s no harm in changing your strategy from time to time, having a consistent strategy is what allows you to identify market patterns and find opportunities.
Besides discipline, patience is another important quality that traders should adopt. Your patience, or a lack thereof, can make or break the outcomes of your trading strategy. Instead of closing your positions as an emotional response, you should watch the market and wait for the right time to exit. The same goes for entering a position; your profit targets should be fact-based and logical instead of arbitrary and random.
Don’t Let Fear Control Your Trades
Fear, just like any other emotion, can impair your performance and judgment while trading. A big part of successful trading involves knowing when you’re trading emotionally. Overcoming emotion and seeing things from a logical perspective is half the battle. For that, you’ll need to know the most common types of fear you’ll experience while trading: the fear of missing out (FOMO) and the fear of losing.
The term FOMO is used to describe the feeling of unease over losing a possibly profitable trade. While there’s no harm in entering a position while the value of the security goes up, you should know when it’s pointless to enter. Usually, when the price of a security is up by a huge margin, chances are that you’ve already missed the opportunity to enter. It’s quite possible that as soon as you buy in for a high price, the price will start to decline, leaving you with a security that’s quickly losing its value.
While some worry about missing an opportunity, others avoid them out of fear that they’ll end up losing. To overcome your fear of loss, you should do your research, start off with small trades, and have a robust risk management strategy in place to build confidence.
It’s quite common for new and inexperienced traders to end up overtrading. They assume that being a trader means trading every day and making a profit. But if you can’t find a suitable strategy for current market conditions, or if the market seems unpredictable, it’s best to take the day off.
If you’re opening a position for the sake of trading, it’s likely that you don’t have a well-planned entrance, exit, or stop-loss points. This is a recipe for disaster and can cause you to lose money instead. To avoid overtrading, you need to monitor your emotions and avoid trading when you’re distracted, tired, angry, or sad.
Backtest Your System
In backtesting, you apply a predictive model or strategy to historical data to find out if it’s accurate. As a trader, you can use this method to test a strategy without putting your capital at risk. A few common backtesting measures include volatility, risk-adjusted returns, and net profit/loss. Of course, you’ll need a strategy to backtest in the first place. At the very least, you need to define your position, as well as entry and exit points.
Most traders use automated software that looks for positions that meet your specified criteria. The software adds winning and losing trades to determine if a strategy delivered favorable results over a specific period. Another method is manual backtesting, in which you analyze past trades based on your strategy and add up the results.
Although the specifics of backtesting a system can vary between traders, there are a few basic steps.
- Determine strategy parameters.
- Specify if you’re trading a single currency pair or stock or numerous markets. You should also define how long you’re collecting results. Over the past week, month, year, or 10-year period? You’ll get different results depending on what you choose.
- Record all the trades that match this strategy and add them to find the gross return. Then, deduct any trading fees or commissions to fund the net return.
- Compare this net return against the capital used to make the trades. This gives you a percentage return, which indicates the strategy’s success level.
Cut Your Losses and Move On
Many new traders have a hard time getting used to the idea of losses. But the sooner you get used to it, the sooner you can focus on building effective strategies. Remember that you’ll face losses in any market – it’s something you can’t avoid. You can, however, decide how much to lose. Smart traders manage their losses and make sure they don’t exceed a specific level. They do this by cutting their losses and moving on instead of holding onto losing trades.
Some traders make the mistake of holding onto losing trades in the hope that they’ll recover. Unless you’re aiming for a long-term strategy, you can almost never recover major losses. Cutting your losses at the right time can mean losing 5 percent rather than 70 percent. While there’s no specific level at which to cut your losses, a rule of thumb for most traders is to cut losses whenever the security falls 5 to 8 percent below the price they purchased it at. Regardless of what level you choose, just know that the sooner you accept a loss, the more you save in the long run. Not to mention, it’s easier to bounce back from a smaller loss, while a string of bigger losses can take you months to recover your investment.
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Learn From Your Mistakes
As mentioned earlier, losses are inevitable in the world of investment and trading. In fact, knowing to accept risks and coming to terms with losses is what separates a successful trader from the rest. Many traders tend to build a strategy based on the idea that they’ll gain more than they lose on an average trade. It’s much more realistic to build a strategy based on the idea that you won’t turn a profit with each trade. Sometimes, the most you can do is to break even or avoid losses.
Learning from mistakes is difficult when you consider that the pain of losing is much greater than the pleasure of winning. Nevertheless, experiencing a loss gives you the opportunity to become a better trader. Here’s how you can learn from the times you got it wrong (and the times you got it right!) by creating an evaluation strategy.
- Create a trading diary. With each entry, add notes as to why you bought or sold, as well as the levels you chose for stop-loss or take-profit. Additionally, it helps to add a screenshot of the chart during your trade so you can review it later on.
- As mentioned above, you should take the opportunity to review winning trades as well. This allows you to determine whether or not you can replicate a specific trade.
- Consider what you would change. Did you set very tight stop-loss orders? Did you decide to take profit too soon?
By spotting your mistakes, you’ll know what to change in your strategy. Instead of beating yourself up over past mistakes, it’s much more viable to refine your strategy and know what not to do.
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