The Trader: 15 Steps To Profitability

Michael outlines how to get to profitability as a trader in the first part of his 15-step walkthrough.

Every trader’s ultimate goal is to be profitable. It’s a long journey which many fail.

A statistic I display at the top of my trading course is that 90% of traders lose money (Barber, B.M., Lee, Y.-T., Liu, Y.-J. and Odean, T. (2017). Do Day Traders Rationally Learn About Their Ability? SSRN Electronic Journal.)

However, with a well-defined plan, and a commitment to execution, profitability can be achieved.

In this article, I’ve drafted out 15 steps to get there.

1. Find the exact types of stocks you want to trade.

The market is big. There are currently over 2,000 stocks listed on the London Stock Exchange.

Do you want to trade specific sectors? Maybe you want to specialise on one platform first (SETS or SETSqx)?

And maybe you want to choose a specific market cap?

For example, when I started trading I focused mainly on the smaller end of the market because of the market’s inefficiency. I dealt with market maker stocks because they were smaller and had more volatility. For someone with a small account who wasn’t wishing to use leverage this made sense.

Once you’ve decided on the stocks you want to trade, you now need to:

  • Learn about these stocks
  • What drives the stock prices
  • The mechanics of the market

Each platform has its own unique characteristics.

For example, auctions are a big part of SETS stocks. These are thinly traded on SETSqx but having direct market access to the uncrossing trade is a big advantage.

Understanding why prices move can help you identify what you need to look out for in the market.

Once you’ve clearly defined the stocks you want to trade and understand the platform they trade on, we can move on to number two.

2. Find the exact patterns you want to see in those stocks.

With SharePad you can look back at historical data and pattern-match.

People say history doesn’t repeat itself. Maybe not exactly, but I’m reminded of the classic Jessie Livermore quote.

“I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”

The market has always had booms and busts. It always has done. And this shows up in price action.

By looking at commonalities you can find potential patterns that you can trade and ultimately a pattern that can be used repeatedly.

3. Work out how you can find these patterns repeatedly.

SharePad offers excellent filtering capabilities (you can find my filters in the Filter Library by searching “Michael”) and you can use these or build your own to find the patterns you want to find repeatedly.

Sometimes it can help to swap ideas with others’ and ask questions. The Chat feature is great for this (Traders Chat Channel) and you can also find new information sources.

This leads us onto number four…

4. Know the amount of time required per day/week to find these trades.

Having a routine is an important part of trading. To have a routine, you need to know long you’ll need per day or week in order to find these trades.

Ideally, you need consistent idea generation, because no ideas mean no trades.

Anything that saves you time in this regard saves you money.

You also need to build your trading routine into your existing routine to make it sustainable.

5. Start doing the work required to find these opportunities.

Knowing what you need to do is one thing. Doing it is another.

Keeping on top of your trade inputs (RNSs, software, filtering, ideas swapping, news) is essential in order to maintain a healthy pipeline of potential trades flowing.

This business is all about reps and you get out what you put in.

As investing legend Peter Lynch said: “Investing is a rock-turning business. The more rocks you turn over, the more great companies you’ll find”.

As bodybuilding legend Ronnie Coleman once said: “Everybody wanna be a bodybuilder, but don’t nobody wanna lift no heavy-ass weights.”

6. Build a morning routine to place these trades and monitor your business.

Lots of traders like to wait and see if they’re right before placing a trade.

However, you’re paid to execute when the risk/reward is in your favour.

If you wait to see how the trade is playing out, then you might get in at a poorer risk/reward.

Ironically, the confirmation that you were seeking has now led you to enter a worse trade.

You need to trade as your plan dictates and monitor your business. To do that, you need a trading journal…

7. Start collecting initial data from your trades into a journal

You can then create a simple Excel document or Google Sheets (my template is here) with several columns including entry, exit, position size, commissions, P&L, and emotional feelings.

Collecting data is essential because without it you can’t improve.

Most traders don’t use a trading journal and most traders don’t make any money. I’m convinced there is a causation here.

Once you’ve collected some trades, you’ll now have some data to show for it.

8. Open your journal to look at your winning trades to find consistencies.

A small number of trades will generate most of your P&L.

If you can find the conditions for success, you can replicate them.

Look at:

  • Entries
  • Fundamentals
  • Market conditions

You’re looking for patterns in this data that you can exploit and use to your own advantage.

Being in this position means you’re already ahead of most other traders.

In my next article, we’ll continue with the trading journal and complete the last 7 steps.

Michael Taylor

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Twitter: @shiftingshares