What will determine your success as a trader more than anything else is how well you plan your trades. You can pick poor stocks and make terrible predictions but if you plan your trading strategy effectively, then you will still do extremely well.
The standard methodology for many traders is to buy a stock and then determine a price target and wait for it to hit. Most traders will also set a stop just in case the trade doesn't work, so they can cut losses. The goal of this approach is to let winning trades run while quickly cutting losers. Success is largely a function of making good predictions.
Sometimes that works well, but many times it is a sub-optimal approach. The problem with this approach is that it doesn't address the biggest issue that traders face: volatility. Traders are constantly trying to figure out a stop level that will keep them in a trade as the stock price moves around but will prevent them from a big loss in case the trade doesn't work.
Whether a trade works or not is largely a function of setting the right stop. In most cases that is just pure luck. Every experienced trader has dealt with a stock reversing back up as soon as their stop is hit. It is almost uncanny how we can set stops at the exact bottom tick.
The better approach to planning a trade is to not only have more tolerance for volatility but to try to take advantage of it when it does occur. The way to do that is to think of a trade as a continuum of moves rather than a single buy and a single sell.
Think of a trade as a continuum of moves rather than a single buy and a single sell.
I've often found that entering a trade with the mindset that it is not going to work right away is a good way to attack a situation. I will take a position with the hope that I can buy more at a lower price. Not only did I not fear the inevitable volatility that will occur, but I will welcome it and profit from it.
Many experienced traders believe that you should never average down a position. That is good advice but there is a very large difference between impulsively adding to a position that has dropped versus having a strategic plan to buy additional shares due to normal volatility.
Averaging into a position over time has great strategic value when there is a master plan to do it in an effective way.
My belief is that it is impossible to predict stock movement with great precision. We never know what is going to happen next so why pretend that we do? Why not make a series of buys as a stock jumps around and then exit in the same way?
When I identify a stock that I think will do well, I don't immediately load up. I make an initial buy that will force me to watch it more carefully, I then consider what catalysts there might be and when and where I want to add positions.
I also have some idea as to when I will deem the trade to be a failure. As a trade starts to work I may ramp it up more aggressively or claim some early profits. It will depend on a variety of considerations and the overall market.
When you think of a trade as something other than just a single buy and sell, you allow yourself to employ the power of strategy. Volatility is no longer your enemy but a way to enhance your profits. It can be highly complex and takes some efforts but that is why it can be so profitable.