Market Wise

A Stock Trader's Top 12 New Year's Resolutions

"The path to profitable stock trading is paved with consistently-applied discipline." No, that's not a famous quote....at least not yet anyway. That's just the summation of my trading knowledge after many - maybe too many - years in and around the stock market. Fortunately I've got a few more specific trading tips and tools to share with investors than just a broad observation, but I think discipline above all else is the difference between great traders and everyone else.

In case you're wondering why I chose twelve trading resolutions instead of the traditional ten, my intent was to give you one for each month of the year. See, habits are easier to learn one at a time. If you only have to worry about one each month, that gives you roughly 30 days to really start living it before moving on to the next one. By the end of '08, I hope you're all lean and mean trading machines.

Anyway, here's what I'll be thinking about between now and 2009.

1. I will make a point of ignoring the news (TV, magazines, newspapers) when they tell me where or how I should invest. I will find my own stocks based on my own fundamental or technical criteria. (If you want to experience sheer, jaw-dropping irrelevance, record an hour's worth of financial news today and play it back a month from now. Not only will most forecasters have been wrong, the discussions from back then won't even be close to the hot topics at the time.)
2. I will read one book about how to trade or invest better, and then apply that knowledge.
3. I will buy one stock that I found solely because I first found a strong sector or industry. Our brains might not recognize it, but we tend to mentally expand an individual stock's strength into a whole group or sector. (e.g. If Microsoft is doing well then all software stocks must be doing well.) In reality, it's usually the other way around - the sector influences the stock. The problem is, we rarely hear from the media about a strong sector or industry...the individual stocks get the attention. If you really want to catch a rising star, first try and spot the industries starting to move.
4. I will buy one foreign stock (ADR) based on that region's strength. No, I'm not saying randomly pick a stock from the next big emerging market. I'm saying find one of the leaders within an emerging market. The U.S. markets are rarely the globe's best in any given year. Go out and find that bull market.
5. I will apply a consistent stop-loss strategy. In cases where I think it's better to disregard my stop-loss strategy, I will still follow a consistent stop-loss strategy anyway.
   
   (The next three are all related.)
   
   
6. I will set specific monetary goals for myself. That means I will establish, weekly, monthly, and quarterly return goals for my portfolio.
7. I will map out a specific strategy or plan for achieving those goals. If you're working on a lofty 100% return, you're probably not going to be able to do that with a bond fund. You'll probably need to add options/futures, or leveraged funds to your repertoire. Also, are you going to employee a trading strategy or system? If so, how? Is your current methodology actually proven, or is it based on hope? Do you need software or data? Put it all in writing. Get specific.
8. I will monitor my results weekly. In cases where I don't feel like it, I will still monitor my results weekly anyway. (This can be a real eye-opener about how well your strategy is actually working.)
9. I will let at least a piece of my best trades continue to rise, even if I want to lock in a profit. Ever heard of the Pareto principle? It's better known as the 80/20 rule. For traders and investors, it just means that 80% of your profits come from 20% of your trades. The reality is that trading 'grand-slams' are few and far between, so when you get one, you have to maximize it while you can. I'm convinced I've made the majority of my capital gains on trades I originally wanted to sell quickly, but luckily held onto them. If you can't do that, the next best thing is to sell some of the trade, but keep holding the rest. (Never forget, however, that the 80/20 rule still applies...so don't freak out if a trade you're holding seems to stagnate.)
10. I will have fun when trading. No, it's not stand-up comedy, but you don't have to suffer to prove your love for the market.
11. I will treat trading and investing like a business instead of a game. Most people spend more time planning one vacation trip than they spend planning a lifetime's worth of being in the market. The 'fun' resolution still applies, and you don't have to make it a full-time job, but stocks really can't be just a hobby if you want top results. Therefore, make a business plan the way any corporation would.
12. I will not lose sight of what's most important to me - friends, family, spirituality, charity...whatever it is that means the most. All the investing gains in the world won't matter if you forget what you're doing it for. Strange as it may seem, I suggest adding those personal goals to your general trading goals list.

There you have it - my twelve resolutions I think will help me be a better trader in 2008. Like I said, I'll focus on one per month, and hopefully be applying all twelve by the end of December.

Have a great year.

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