My name is John Woolfitt, Director of Trading at Atlantic Capital Markets. During my time in the markets, I’ve traded champagne bull markets, horrible bear markets, and everything in between. Throughout this time there have been a few golden rules and disciplines that I believe transcend experience, market conditions and wealth.
While I can’t guarantee that this online trading guide will provide you with endless benefits, it will certainly help you along your online trading journey and, more importantly, help you avoid those costly mistakes. In this brief guide, I wanted to highlight a few golden rules that every trader should know.
My number one online trading mantra is “Boring profits are better than exciting losses”.
Be aware of unrealistic expectations
warren buffet is considered the greatest investor of all time. Its average annual returns over the past 50 years are “only” about 20% per year, compounded. If you aim to earn more than 20% per year for the next few years, you are planning your financial future on the assumption that you are better at investing than the greatest investor of all time.
Spoiler alert, you are not. You can still aim for returns above 20% per year, but that naturally comes with an increased risk of bigger losses. As part of a broader portfolio strategy, targeting returns of 20% or more in an online trading account can make sense, but you need to understand what you’re doing.
Keep score of your online trading results
At the end of any period, weekly, monthly or yearly, your biggest loss should never be greater than your biggest win. At the end of the period, you should have an idea of your win/loss ratio, average trade size, average win/loss. You don’t play golf (or any sport) and then wonder what your score was at the end of the game, it is tracked throughout the game and kept as a record for later analysis; you must do the same with your positions.
Sizing the correct position
Ask most amateur traders what their account’s bottom line would be if they put all their funds into one position and made 50% and then closed the position. Then they put all their funds in another single position and that lost 50%, closed position, most would say they would be back where they started.
But of course, that’s wrong, they would be down 25%. It makes no difference if the order is reversed.
Example of online trading:
£50,000 + 50% = £75,000 but £75,000 – 50% = £37,500
£50,000 – 50% = £25,000 but £25,000 + 50% = £37,500
The power of percentages and position sizes means that placing positions that are too large for your account makes your account very susceptible to losing capital over time.
The short version of this rule is: – if you think about this position in your everyday life, or care about it the last time in the evening, it is too big.
Generate profits, reduce losses, use stop loss orders
This rule may seem as trivial as writing “eat less and exercise more if you want to lose weight”, since it is spectacularly easy to write down. The difficulty is in doing it. This is why the majority of the Western population is now overweight; they know the reason, the problem is in doing and not in knowing. “Managing profits and reducing losses” is another thing that is just as simple to put down in writing, but difficult to put into practice.
Be aware when you break this rule, because you will at some point. Beware of “this time it’s different because…”. logic that you will try to use to give yourself the excuse to break this “simple” rule. A technique to help counter this is to decide when you place the position, when you will go wrong. Either a price level or a change in fundamental position. Decide it from the start, then stick to it.
With the placement of any position, there will be an upside target expectation, and it is human nature to focus on this more than the downside. However, there is also a level that means the trade is no longer the trade you originally thought. This is where using stop loss orders becomes essential to your success. Nobody likes taking losses or triggering stop loss orders, but the reality is that they are there as your safety net. The reason for this is that it also means that if the stock price has fallen, you can walk away from it and reassess your position – maybe even look for a better entry point lower, or walk away altogether.
Stop loss orders are very much like a parachute in that it is “better to have it and not need it, than to need it and not have it”.
As a rule of thumb for any trade, you should aim to gain more than you risk. so if you think a trade will return 10% then a stop loss of 5% is appropriate. Not the opposite !
Have a “critical” awareness of the news
The active investor must be aware of the news flow that moves their market, but the successful trader looks behind the simple headlines and realizes that once news is in the public domain, it is old. news. There is a strategy to “surf the news” in the headlines, to buy Tesla when Goldman upgrades electric vehicle stocks for example, but active traders are aware that the “real” buying has already taken place before announcements like this are made. All news like this creates a second wave of “title-based” trading; Traders can profitably jump and ride the wave of this news flow, as long as they are fully aware that the wave they are riding will often have a trough behind it and risk being wiped out.
Be aware of your place
Too many traders act as if the market is in relation to them, it is not. Never try a revenge trade, never try to go back to a level because it “should have worked last time”, never feel like the market is scaring you out of your stop level. Unless you have millions, and frankly tens of millions or even hundreds of millions in the market, what you are doing is irrelevant to the wider market – think appropriately.
Warren Buffet is in touch with the markets, we are not.
Focus your attention
Especially for those coming to the markets for the first time, focus on one market and a general approach to online trading. Most traders seem to focus on stocks and technical analysis. If that also describes you, focus on that as much as possible, while keeping an open mind to opportunities outside of that. There will always be something. somewhere vying for your attention, which could make you the jack of all trades and the master of none. Choose an area, potentially quite small, and study it. Then, pretty quickly, you can become an expert on it. Then, from this basic knowledge, you can develop in other areas.
Entering the position
One technique that beginners to online trading may find very useful is to split trade entry points – if you’ve followed the rules and decided that a position size of £10,000 is right for your portfolio, then you do NOT enter a £10,000 position on the open. Instead, you’re looking to build that position over time, buying say £5,000 twice, or £2,500 four times, etc. This approach has an extremely positive psychological benefit.
If the price drops from the original entry level, you are pretty happy because you can now reach the required amount at a lower average price. If the price goes up, you can still be happy because what you bought has gone up in value. That way, psychologically, it’s a win/win. Mathematically, of course, these results are different, but you’re not trading based on statistics and math as much as you’d like to think. Thus, this technique provides very useful psychological support, which both new and experienced traders find very useful.
A word of warning
Never average prices like this if that was not your explicit intention from the start. This can run the risk of you trying to double your losing positions and can create huge losses. This strategy should only be used when you have followed the trading rules and calculated the correct position size, then divided this “correct” position size into different slices from the start.
Closing your online trading positions
Another useful technique should be used when closing positions. When it’s time to close a position, but you feel a psychological reason/excuse to hold it (especially if it’s out of the money), then, at the very least, close some of it on- field.
If you hold back from closing the entire position, fine, but close at least a few right away. The psychological benefit of this technique is that when you take action, you will likely find that it will then be easier for you to close the entire position in the future. I find this technique equally useful if a position is profitable and I don’t know if it will go higher. benefit if it goes higher; but if it pulls back, you’ve still crystallized half of your profit at the higher level.
Remember that it is almost impossible to enter from the bottom and exit from the top without luck, and when it comes to investments and trading it is always better to have approximately right that absolutely wrong.
About Atlantic Capital Markets
Atlantic Capital Markets is one of the few fully regulated independent multi-asset advisory brokers in the UK. As a privately owned and operated brokerage, we are able to stay focused on what really matters: our clients. We offer trading strategies and services related to a range of instruments including stocks, options and derivatives. We provide investors of all sizes with a simple service, built on the foundations of a strong personal relationship. Our relationship-based service is tailored to your personal needs for investors who want a more traditional, reliable and personal approach to investing.