The Top 10 Things That Separate Pros From Amateurs

Jared Levy, Editor, Smart Investing Daily
Monday, September 27, 2010

Trading I’ve just returned from our Global Opportunities Summit in Las Vegas and my mind is swirling with ideas for Smart Investing Daily. I not only had the pleasure of meeting many of you, but also got the chance to have some in-depth conversations with many of my fellow editors from around the country.

At the summit, I noticed that there were common threads that wove their way through the minds of both the speakers and attendees.

Our goal at Taipan Publishing Group is to not only help identify potential investment opportunities, but close the gap between what has made many professional traders successful and what the average investor needs to know.

I assembled 10 of the most important techniques and mantras you should use to take your trading and investments to the next level.

In coming issues, you can be sure I will take each one and more into great detail, but this should at least get you started.

No. 10: Hedge Your Bets/Diversify

If you are an options trader, you can use spreads to reduce your investment’s exposure to the overall market. Some option spreads can not only greatly reduce how volatile your account is, but they actually can put the probability of success on your side.
Diversify your investment portfolio not only with stocks in different sectors, but also with BETA! Beta tells you how your stock will typically react to the market. If all your stocks have high betas, your account may be susceptible to just as much if not MORE volatility than the market, even if you bought stocks in different sectors.

No. 9: Plan Your Risk Ahead of the Trade

Have a maximum downside dollar and/or percentage risk spelled out ahead of your investment, not after the fact.
Use stop-losses, put options or spreads to solidify your plan if you understand how to use them.
Don’t exceed your comfort zone; this may cause irrational decisions in your trade. In other words, don’t make your investments too large in any one security.

No. 8: Be a Contrarian

It’s usually better to buy on rumor, sell on news.
By the time everyone is talking about it, it might be too late.
Don’t be scared to think “outside the box.”

No. 7: Sell or Protect While the Trend Is Still Strong

It’s much easier to sell when a stock is rising in value vs. when it’s in free fall.
Remember, insurance is cheaper before you have an accident, so if you are an options trader, buy your puts when the market is complacent, not panicking.
Think of a climber who is 30 yards from the summit of a mountain and runs out of oxygen. He may touch the top, but he won’t get down. This is analogous to a stock that has been rallying for a long time and you take no action to exit. While you may see the top in the stock, stocks can change direction frequently, and most investors don’t get to sell the highest high!

No. 6: Learn From Your Losses, NOT Only Your Profits

Your losses can tell you just as much if not more about your trading personality.
Sometimes just limiting losses can turn an unsuccessful trader into a thriving one, or at the very least, allow you to live to trade another day.

No. 5: Be Consistent in the Types of Issues You Trade

Look for similarities in the behaviors of your securities; this will help you to find the patterns you are looking for and will help minimize errors. These attributes include ATR, Price, Volatility, Sector, Chart Patterns.
Remember that most professionals are specialists in a certain group of stocks or sectors.
If it feels uncomfortable in a trade, it is probably not for you.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stockmarket for you with our easy-to-understand investment articles.)

No. 4: Think Three Steps Ahead

Have a game plan for all possible outcomes in a trade (most retail investors just focus on the best outcome) and have alternatives for a flat investment as well as one that begins to go against you!
The analogy here is to pretend that you’re playing chess or poker; in both games you are thinking about what you might have to do if your opponent (the market) makes a move that puts you in danger. Investing is no different.

No. 3: Trust Yourself

Professionals are confident in their abilities and their plan.
NO ONE knows exactly what you are thinking; only you can control your emotions.
Your risk tolerance and views on the trade are completely unique; therefore even though we can offer trade ideas and theses, you must execute them in your own way and use your individual money management to find how much of your account you will invest.

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No. 2: Be Adaptable, Yet Adept in Your Strategy

Be able to admit you’re wrong and change direction when needed.
Don’t apply a strategy you are NOT COMPLETELY comfortable with.

No. 1: Ask Questions

If there is something you don’t know, always ask.
If there is any piece of the trade that didn’t make sense, don’t trade it with real money until you are able to quantify it. (Many brokers offer paper trading platforms to test out new strategies.)
The only stupid question is the one that is not asked.
Professionals were not born that way; they too had to learn just like you!

In summary, remember that at the end of the day, you are in control. In trading and investing, just like in many other areas of your life, it’s the little things that usually make the biggest difference.

Taipan Publishing Group will give you the vehicles you need to generate exceptional returns, but don’t forget that it is you behind the wheel!

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