I often get asked, "What's the best way to trade the market? Does day trading work better than swing trading? What about options and forex?"
Many trading educators aren't even sure. They will guess that the best way to trade is to buy all breakouts, or use non-quantified oscillators, or to trade hot momentum stocks. But the truth is that none of these works best, or possibly even works at all!
When it comes to trading, if you want to succeed, you need to consistently trade stocks that have large historical edges. And you need to exit them at optimal levels.
Many professional traders even believe that common practice strategies, like using stops, can lead to lower returns. That's something that few traders think about until they get stopped out over and over again. Or even worse, some traders see a stock gap lower overnight; opening much lower than where they placed their "protective stop".
Timing is also a factor. Getting out too soon could leave too much potential profit on the table. And traders who get out too late, many times see the gains turn into losses.
Let's take a look at a solid trading plan to get you maximum results from your trading. Here are the keys:
- First, start with a list of stocks that have potential edges. These are usually stocks which are trading above the 200-day moving average. These are stocks which are in longer term uptrends and many traders and money managers like to focus on these stocks.
- Follow that up by narrowing your list to stocks which have pulled back from recent highs. How do you do this? One good way is to use the 2-period RSI as an indicator. Then wait for the stock to reach low RSI levels (ideally under 10 is best). The lower the level the RSI reaches, the better the pullback usually is.
- After finding these stocks, wait for them to pull back further the next day. Ideally, buy them on limit order 2-5% below the previous day's close. Since 1995 this has consistently increased the edges on these types of set-ups.
- And finally, learn where to lock in your gains and where to exit your positions. One of the better ways we know is with the 5-day moving average. Our research has shown that once a stock closes above its 5-period moving average it's a good time to begin locking in some if not all of the gains.
With this daily plan, you'll be in and out of the market a few times a week. Compare that to day trading which means sitting in front of the screen all day, Sure that may make money, but it doesn't leave much free time to do anything else.
Swing traders love the results they get when they trade successfully. Remember, very few people get rich overnight from the markets. No matter how you trade or invest (or do anything in life), it's a journey that leads to doing this successfully on an ongoing basis.
Risk control is also essential if you want to trade successfully. In fact, I give more credit to risk control for being a key factor in successful trading than I do the strategies. No matter what you do, you can't out-trade poor risk management (just ask the guys at Bear Stearns!). So cut excess risk and margin from your trading. Better returns will likely follow.
With the right strategies and proper risk control, you'll quickly become a better and more consistent trader.
Note - If you're looking to improve your trading, and learn new trading strategies that are backed by more than a decade of research, check out the TradingMarkets Swing Trading College.
Larry Connors is the CEO and Founder of Tradingmarkets.com, one of the world's largest sites for traders, and the head of Connors Research LLC.
