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3 Profit Making Criteria

Do you want to make a fortune trading and investing in the financial markets? A sound game-plan is the first step to building wealth. This approach enabled many to prosper and accumulate profits over time. Ask yourself the following questions before every trade:

 

1. Key Questions for Every Trade

 

  • What is my trading strategy?

  • Am I getting the highest return potential for the lowest risk?

  • How will I limit losses, protect profits and preserve capital?

  • What objective evidence suggests a market movement in favour of the trade direction?

 

 

Follow this simple process every time you trade. It serves as a good foundation for developing a strategy that leads to prosperity. Trading without a plan is planning to fail. There are many generic plans available which can be used as a starting point. Thereafter, adapt it to support your unique financial goals and aspirations.

 

2. Diversify to Deal with Uncertainty

Nobody can predict the market with consistent certainty and accuracy over time. Searching for the perfect trading system is a waste of precious time - it does not exist. The markets are unpredictable and uncertain; a concept every successful trader is comfortable with. Learn to work with risk and use it to your advantage.

Institutional investors and banks use wealth building formulas to manage risk and deal with uncertainty. Dr Harold Markowitz published a Nobel Prize winning theory in finance in 1990. His paper demonstrates how to maximise profits while minimising risk through portfolio diversification and asset allocation.

Diversification is a powerful risk mitigating strategy. It also enables one to benefit from exposure across various asset classes globally. Some examples of asset classes are; stocks, bonds, commodities, currencies, property and cash. 

"Different asset classes that are imperfectly correlated to each other offers greater returns and reduces portfolio risk."

Effective asset allocation is a wealth building philosophy that helps one sleep better at night. It should be the foundation of every investment plan.

It is important to remember that diversification does not mean buying variations of similar instruments e.g. in the equities market, holding four information technology stocks is not a diversified portfolio.

Proper diversification requires capital allocation across asset classes and also within asset classes. Buying into index trackers and funds are simple cost effective ways of benefiting from broad diversification. Experienced investors may research and transact in the diversified instruments individually. This requires a considerable amount of time and dedication, at a higher cost.

 

 


 

3. Use the Stop Loss

Anyone can buy a financial instrument; the art is knowing when to sell. One cannot rely on technical and fundamental analysis alone to cater for all eventualities. The time tested stop loss is a powerful tool.

" It means one never enters a trade without knowing the maximum possible loss in advance. " 

This is a life-line when the market moves against the trade direction. Hope is not a strategy, there is no room for guesswork and emotional decisions. A stop loss ensures capital and profits are protected in every trade. It provides confidence to let winning trades run.

The stop loss can be set at a fixed price level from trade entry or trailing at a fixed percentage from current market price.

If the trade is profitable, hang on and accumulate profits. A sudden market reversal exits the trade automatically. The position is closed and losses are cut early - no questions asked. Profits are protected and allowed to run.

It takes discipline to use a stop loss for every trade. This powerful yet simple technique grows capital. Make it a trading system rule - no exception.

 

4. Conclusion

Optimal management of trading capital is influenced by an individual's net worth, trading experience, risk tolerance and time horizon. Avoid emotional attachment to a position and overconfidence in yourself or the investment. The recipe for success in the markets is having a strong desire to be wealthy and the discipline to achieve it.

 

 

 

 

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