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The stock market is getting more saturated daily. In truth, this is a great development, but, it also means that there are a lot of people who might not know their roles and what they should actualy be doing when they approach the markets as a private trader.

In this article, I want to share some useful insightsto help you understand your role as a private trader.

This article covers:

  • What is your job when you learn stock trading?
  • What is the market’s job?
  • What are you trying to achieve by trading?
  • What are the market’s aspirations and roles in helping you to achieve your goals?

Understanding Your Job as a Private Stock Trader

When you learn stock trading, your first job is to provide the market with capital. This is what you do when you invest money into the market.

Placing your capital at risk in the market gives you an opportunity for you to make money. It also injects extra liquidity into the market.

But to actually make a profit when you risk your capital, you also need to discover your trading edge. This edge is your advantage over other traders in the market. Without one, you cannot profit from your trading.

Your edge is the key to making profits as a trader. It is what you take advantage of while other traders struggle.

From there, it’s also critical to let your edge work for you. This is where your skill comes in. You have to keep exploiting that edge, so you can maximize your profits and make the trading profits you want.

The problem that a lot of beginner stock traders have is that they don’t stick to an edge for long.

Most of the time, when a trader finds an edge and backtests it to confirm it is profitable, they immediately begin tweaking it. In a bid to make more profits, they change things like positions, lot sizes, trading indicators, filters, and more. While there’s nothing wrong with trying to improve your trading edge, constant changes to your trading system rules can backfire because you end up curve fitting your rules to past data and ruining your future profitability.

As a stock trader, once you have developed a clear understanding of your edge and confidence in the rules that make it work, you should be slow to make changes…

If it isn’t broken, Don’t fix it!

So, you’ve got your capital, your edge, and a strategy to maximize that edge as much as you can.

Still, the job isn’t done.

As a trader, you have to keep watching your trading edge for stability. The moment it begins to lose it’s profitability, you need to be ready to make necessary changes or suspend trading the system.

The stock market can be fickle, and it can change behaviour for a range of reasons so monitoring the profitability of your trading edge is stable. You don’t want an ineffective edge, especially when there are profitability opportunities. You can monitor your trading edge by backtesting your system with Amibroker regularly and ensuring that the trade profitability is stable, the equity curve is behaving as expected and the drawdown is within historically normal levels.

The moment your edge starts decaying, your fourth job kicks in – you’ve got to find a new edge.

This is why it is important for you to have a portfolio of stock trading systems – so that you have a diversified set of edges that you can use to make money in the stock market. If one of those edges is in drawdown, errodes or fails then you have others that can still grow your account.

The Market’s Role in Stock Trading

Now,  you understand what you need to do to succeed as a stock trader. It’s also important to understand the market’s role in all this.

As you learn stock trading, you’ve most likely heard that the market is always working against you. As we all know, the market isn’t a person – rather, it is the collective actions of many individual traders.

These traders are also looking to make the best out of their situations. People react in different ways to each market development. The collection of these individual actions is what makes the market.

As you learn stock trading, you must understand the effects of the market’s actions on traders. This way, you can protect yourself from it.

The market’s first and most important role is to shake you out of your positions. When you establish a trading position, the market can move differently to what you expect. This could cause you to be uncertain and unsure of what you just did.

Most people who learn stock trading will feel unnerved by these regular price swings… but you must develop sufficient confidence in your trading system to follow it through the inevitable ups and downs. You do this by learning to backtest your system with trading software like Amibroker.

Except you’ve got excellent impulse control, your mind begins to race when you put money into the market. Your anxiety levels rise even further as more money is at stake. When the position begins to favor you, there’s a level of excitement that grips you.

This excitement turns into anxiety once the market repositions and starts rending downwards. These emotional feelings are the same for a lot of us. We look at trades and react based on how they play out. Depending on your emotional intelligence level, these emotions could affect your decision-making process.

Over time, these emotions try to shake you out of your position. However, your job as a trader is to know that you’ve got an edge. You’re ready to follow that edge, and you won’t worry about any of the emotional swings that could come your way.

You also need to understand that the analogy above is only at the single-trade level. When you enter into multiple trades and want to make a profit, you still need to be on your guard and control your emotional reactions to the market.

The more clinical you can be, the easier it will be for you to follow the rules, and the higher your chances of making a profit.

The market’s second job is to shake you out of your approach and strategy to the markets.

Say you’re trading a trend-following method and you have multiple positions open. Your size in each of these positions is going to cause you some stress as they move. The hope is that they all move in your favor, but the reality is that many of them won’t. As you see more of your positions moving against you, the stress and anxiety will make you doubt your general approach.

As a trader, you risk get stressed about pretty much everything – each trade, your general account balance, the trading systems, etc.

Of course, you should know that no stock trading strategy can promise profits at all times. It’s almost impossible for you to have a strategy that will always make profits a straight line day after day.

However, amid the profits and drawbacks, you need to be resolute in your strategy and understand that everything happens in seasons. There’s no reason to deviate from your strategy when you know there will always be corrections here and there.

Once you get uncomfortable with the drawdowns and you start making rash decisions, the market has succeeded in shaking you out of your position. Never let your emotions cloud your judgment so much that you resort to gambling or other careless actions.

Monitoring Your Stock Trading Strategy

Now that you understand your role as a trader and the market’s role in rattling you, it is also critical to see how you can monitor your stock trading strategy.

The truth is that following your strategy as a trader critical for your trading success. It helps to keep you grounded and maintain your stability in the face of changing market conditions.

However, there comes a point when you have to have to stop following these rules as they don’t seem to apply or profit anymore.

Keep in mind that this doesn’t necessarily mean you should break your rules. Instead, it simply means turning them off because they are no longer viable.

So, when do you know you’ve reached this point?

How do you know when to stop following these rules?

This is where it becomes critical to monitor your rules and their performance.

When monitoring your rules, it’s important to not obsess over your performance or the swings in your general account. Doing that will only lead you to losses as you tend to be ruled by your emotions and not an objective strategy that you began with.

Instead, you need to pay more attention to the system and its performance metrics.

If you have a trading system, you will need to monitor how it performs over time. Monitor the accuracy of the entries, the sizes of your losses and wins, the equity curve, and drawdowns. You want to ensure that these metrics are within the bounds of what you would normally expect from your strategy, based on extensive backtesting.

So, as a trader, you will need to learn how to backtest your trading system.

Once you’ve done that, it becomes much easier to monitor your system and your strategy. Also, remember to be obsessive about executing your stock trading strategy as it was programmed. Once you find that your strategy is decaying, you can suspend the system and investigate what might be going on with it. Or, you could simply retire it and replace with another trading strategy.

All in all, remember that you have to be very vigilant. Markets can be fickle.

For instance, 2020 saw all-time highs in equity markets. From there, the market took a straight nosedive into a bear market (this had never happened before). Such a shifting market dynamic could cause problems for your strategy. This is why you need to continue monitoring your performance and that of your strategy.

The trick that most successful traders use is to have multiple trading strategies. You can have a single strategy that works, and that can be great. However, to get the best results, you should have multiple stock trading strategies.

So, if you’re not systematic, follow these steps:

  • Get a trading system that works.
  • Build confidence in your system by backtesting and begin trading it.
  • Diversify and look into building different trading systems.

The third step is especially critical if you want to enjoy continuous trading profits. This way, you can ensure that one trading system picks up the slack when the others don’t seem to be working well. With several trading strategies, you can ensure that your account moves smoothly and can effectively navigate any negative market conditions.

Determining Your Expected Drawdown Levels

So, we established that all trading strategies and systems can temporarily experience downturns. Over time, these downturns can leave you in a bad emotional state. Swings happen all the time. But, temporary drawdowns aren’t a reason for you to exit your positions or begin panicking.

At the same time, there are points where you can’t take things anymore and you feel the sudden need to cut your losses before your system tells you to.

So, how do you know when things have gotten to that dire state?

The easiest way to know in advance what to expect in advance by looking at the size of the drawdown and the performance metrics in backtesting. Monitor current performance against the backtested metrics and ensure your live trading stats are within the bounds of the historical performance.

When the metrics are acceptable based on your backtests, your strategy is likely still working. So, you don’t have to worry. When they get out of the normal range, then you might be looking into cutting your losses or changing your strategy.

Maintaining Your Balance Amid Market Swings

Market swings get to everyone – no matter how experienced a trader you are. When there’s a downturn, your portfolio takes a hit. You may feel scared or concerned about what next could happen. But, there are means you could put in place to ensure that you stay grounded. Some of them include:

  • Systemize: Build proper trading systems that guide your trades. You can follow these systems as you go about your activities.
  • Backtest: You need to keep backtesting your trading systems. This is the only way you get to know what they do and how they operate. Backtesting also helps you to understand what to expect when the market moves.
  • Use a Stop Loss: You also need a threshold beyond which you cut your losses and leave the trade alone. You should ensure that a stop loss is always there to help you guard against unmitigated losses.
  • Keep your trade risk low: Risking more than 1% of your portfolio on a trade is hugely risky. Keep your position size small so that when you are wrong you don’t loose too much of your trading capital.

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