There is a big difference between what successful stock traders look for and what the average wannabe looks for. The average investor wants a hot stock tip that is going to go up 10,000% and make them a millionaire overnight.
They do not even think about their specific goal for 1 trade or even what they will do if they lose. On the other hand a successful trader takes 4 things into consideration.
1. What is my Profit Target
The first thing to ask yourself is how much do you actually think you will be able to make on the trade? This is where things like chart patterns can really help you out because they give you a general guide for what to look for.
2. Where do I cut My losses Short
The second thing a professional trader asks himself is where can I cut my losses short? Instead of waiting until they have lost a trade to figure out what to do they must ask themselves that question before hand.
This way they can avoid making rash last minute decisions while they are in the trade, when they are the most emotional. Deciding beforehand also lets you only take trades that give you a very small loss if you are wrong.
3. What Percentage of your Account is the Trade
Next a trader must determine how much of their account so they actually want to risk. The smaller the trade is the less of an impact it will have if you take a loss. Remember capitol preservation is the most important thing in trading.
4. Does it Follow my Rules
All professional traders have at least somewhat of a guideline on what makes a good trade and what doesn’t. If it doesn’t follow their rules then great traders tend to stay away from it.
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