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SmartInvestor | 11 . 2013 |
Kathlyn Toh is a Professional Investor and Trader specializing in the U.S. and global equities market. She is also the Director and Chief Coach of Beyond Insights Sdn. Bhd., an institution that offers the most complete curriculum in our region on the subject of stock market investing. Go to www.beyondinsights.net, or follow Kathlyn on Facebook at www. fb.com/beyondinsights.
2. They follow strict risk management discipline
When we invest in the stock market (any many other asset classes) – we must understand that there is absolutely no guarantee that we will make money. A professional investor or trader understands that investing is a probability game. Even Warren Buffett has made a few mistakes that cost him billions in US Dollars.The truth is that you can make money with a strategy that is right 50% of the time, and you can also lose money with a strategy that has a 90% success rate (if there is actually one). So the key to success is really about managing the risks.
“Never risk more than 2% of your capital in any single trade”
When I first started out trading more than 10 years ago - my results were inconsistent. I could gain a lot and then lose it all back within a few trades, until I learned of this Golden Rule in investing, and this is one rule that I cannot stress enough in my teachings.Many people, when told of this rule, would say, “My capital is not that big - 2% will not allow me to trade any stocks!”While that may be true back in the 80’s, the development of financial markets and technology have changed that. Today, either having an automated stop-loss, or using hedging strategies can apply this rule.The availability of leverage instruments like CFDs, Options and Futures can also help in managing risks if used properly. So if you are willing to spend some time and effort to learn and apply what I have mentioned above, you are more likely to achieve your investment goals faster.Making money consistently is all about risk management being your first priority, profits secondary. If a trader thinks about “how not to lose money” first, he will then focus on managing risk of his trades. While you don’t have to follow the exact rule I mentioned above - you must have your own risk management rule.
Final Suggestion
Once you have developed your strategy, it is also important to have a plan to execute your strategy. A good investment or trading plan must have the following elements:
(a)
It is designed to meet one’s financial objectives, and hence the objectives must be clearly defined. For example - if one desires a 30% return per annum based on a $10,000 capital - then the plan has to be based on the 30% returns per annum objective.
(b)
It must be a reflection of a person’s personality and time availability. I have met traders who tried to use short term strategies or even day trading strategies, without realising that their personality or time availability are better suited for medium and long term strategies. From my observations it is very difficult for a trader who is trading against his personality nature to have any consistent success.
(c)
It has to include clear entry and exit criteria that govern every trade you make. In other words, every trade must be opened and closed according to what has been pre-defined in the plan and not based on intuition!
(d)
Lastly, the plan must include journaling of all your investments. A good journal will help you in:
• Reviewing your actions regularly
to ensure you are following your strategy, not your emotions.
• Making sure that you learn,
especially from your losses. I see every loss as a tuition fee I pay to the market.As a professional investor and trader, what I do on a daily basis is plan, execute and manage risks; and it’s actually no different from managing a business. If you can also have the discipline to do that on a regular basis - stock market investing and trading can be a very rewarding venture for you.
