By: Chris Rowe — February 24, 2019
As a professional trader, I get asked all sorts of questions.
From the newbie investor just beginning his or her financial journey...
... to the seasoned hardcore trader with years of experience who is very active in the market... I hear from them all.
And as diverse and varied as this group might appear, they all have one question in common.
"Costas, what's your secret to trading successfully and making money consistently in the markets?"
I think they're expecting to hear some fancy incantation, or an arcane math formula that magically foretells future stock prices.
They must think I have real, actual super powers. And as much as I love the thought of bending markets in my bare hands, I'm afraid that I played hooky from Superhero Academy the day they handed out the capes and tights.
So I always say:
Don't over-complicate things. Just trade what's in front of you.
Their reaction is always priceless. ("What? That's it?!")
It's like the first time they realized there's no Santa Claus. All the mystery and mystique goes straight out the window.
But, in a nut shell, that is it! Obviously there is a process. A strategy and a general game plan that goes along with it. But essentially, most successful investors that I learned from and have come to know keep it very simple.
In fact, if you follow these three simple keys, you'll be able to trade and invest in any type of market environment like a Superhero.
Superhero Trader Key #1: Cash Is A Trade!
One of the most powerful lessons you can learn is how to be patient when it comes to the financial markets. You must think of your investing as one long, continuous journey with flashes of fury and periods of rest.
You strike with plenty of activity and action when you feel you have the "best of it" and sense that the opportunity is ripe.
And you recede into cash, or trim your market exposure, when you're unsure and your clarity is clouded.
That's right -- you overweight in cash and keep your powder dry until the market shifts and shows you the path to high probability outcomes. Markets are very dynamic, and the landscape is constantly changing. You simply want to put your money at risk only when you feel the conditions are favorable.
For example, right now the markets are looking very bullish.
The S&P has climbed almost 19% off its December 24th low. The Dow has had a similar rebound. It's up 19.25% over the same span. The NASDAQ? Up more than 21%.
That's all well and good. But if you look at the "true market" (You are making it a habit to look at the "true market", right?)...
... you'll know that all that bullishness has left markets in an overbought state. The odds of a pullback are elevated.
Now is a great time to practice the virtue of patience and wait for a (possible) dip so you can grab stocks at more attractive prices.
So, when in doubt, sit out.
Superhero Trader Key # 2: Never Over-Leverage!
If Superman were an investor, too much leverage would be his Kryptonite.
I've firsthand the way financial ruin can follow from an investor's simply over-leveraging or putting excessive capital at risk.
This is an outcome I wouldn't wish on my worst enemy, as the repercussions in many cases extend far beyond the financial losses. Emotional distress and destruction to personal relationships are common side effects.
In truth, this can easily be avoided. And protecting your assets from potentially catastrophic risk should be paramount before you invest 'dollar one' in the market.
If you can't quantify your risk within a realistic range, you need to take a step back and understand why.
The easiest way to protect yourself from excessive risk is to simply diversify your assets. Essentially, don't put all your eggs in one basket, so if you happen to slip and fall by chance, they don't all crack.
The bottom line is that you'll act on many trading ideas, and not all of them are going to work out like you've planned. Sometimes you may be way off base -- it happens. But don't let the positions that happen to go awry financially cripple you. That's the quickest way to the exit door.
Trade with your head -- and not over it. Simply keeping your emotions in check will allow you to make better, smarter decisions while ensuring your solvency.
Superhero Trader Key #3: Make Yourself Fearless!
Putting real money on the line, especially for newer investors, can really elevate the old stress-levels. I can certainly relate. I was a "babe in the markets" at one point too.
But what you have to realize is that investing and trading doesn't have to be scary. And there are several ways to position yourself in the market that can afford you literally around-the-clock protection of your overall capital.
Trading options instead of directly trading stocks and ETFs is a great way to do this. You can truly define your risk before entering any position, and you can commit far less money while potentially generating much greater returns.
By learning a couple of easy option strategies, you can remove nearly every unexpected risk.
For example, back in 2010, the May 6 "flash crash" (a.k.a "The Crash of 2:45") took billions of dollars from unsuspecting investors. Even if you were a disciplined stock trader with well placed stop-losses on the book as protection, you quickly realized how little protection they truly offer when panic grips investors and gaps appear in prices.
The reality is that had traders structured their positions using an easy-to-understand options strategy, May 6, 2010 would have played out much differently for them.
The point here is simply: Applying a couple of easy-to-use strategies can remove the fear of big unexpected losses. You'll sleep well at night, knowing your positions are fully protected and your risk is truly defined to a maximum limit.
Complete control is a powerful equalizer against fear.
At the end of the day, successful investing doesn't have to be brain surgery, if you use your head and follow these three simple keys:
1. Exercise patience and pick your spots...
2. Trade within your means and keep emotions in check...
3. Employ fully hedged strategies that require less capital, generate higher returns, and define your risk.
You'll be way ahead of the game, and your portfolio will go "up, up and away"!
See you soon,