Improving Your Trading and Investing Mechanics

Paper trading (when you place buy, hold or sell orders without the use of real money), note taking, and back-testing are the strategies that I have found to be most helpful to the improvement of trader mechanics.

Novice traders (and at times, we all feel this way, regardless of experience), tend to think of trading merely as the acts of buying and selling.  They don't recognize the considerable role that mechanics play in success.  Reducing trading to buying and selling is like describing NASCAR racing as stopping and going.  Take a look at just a few of the mechanics of trading and the difference they make toward profitability.  Obviously, not all of these apply to all traders as we each have our own niches in the market.

Specific Skills that Comprise Trading Mechanics

• Idea Development:  Translating observations about the market into specific trade ideas on the Macro level.
• Assessment of Market Conditions:  Recognizing the current state of the market's trends.  Whether it is range-bound, volatile, or low volume.
• Order Division:  Scaling into positions to reduce risk exposure and obtain superior average entry prices (Dollar Cost Averaging).  Scaling out of positions to secure profits and possibly benefit from favorable movement.
• Position Sizing:  Risking enough on a trade to make a meaningful contribution to profitability while avoiding risk of ruin under adverse circumstances.  
• Exit Flexibility:  Moving stop-loss points to protect profits while retaining profit potential.

Clearly, trading is not a skill, but rather a complex, coordinated set of skills not unlike athletics or medical practice.  An inexperienced trader will look at a stock chart and say, "I think we're going higher."  He will then buy at the market with his maximum position size and see if the trade works out.  The trades are neither planned nor systematic in their execution.  The performance is not far different from that of a quarterback who calls for a passing play on 4th and 10.