No matter what security one decides to trade, be it stocks, options, futures or forex. The 7 pillars of trading works for all of them. The 7 Pillars is a unique summary of the proven sets of principles which govern all trading styles by professional traders. They are the essential rules any novice trader needs to learn and hard pressed in their minds when they are trading with real money in order to avoid sever losses.
1. fundamental analysis
Fundamental analysis determine what equity stock to buy or buy and hold. Fundamental analysis also filter out stocks that are overvalued. Fundamental analysis includes two parts: the overall macroeconomic environments and the individual industry, sector and individual company’s earnings growth potential, financial health and etc. Traders pay attention and follow economic indicators to gauge the overall market condition.
2. technical analysis
Technical analysis determine when to enter or exit a position. Combinations of technical indicators (trending and/or oscillating) helps to timing the entry and exit of a position. The price chart of any stock, index or other financial instrument is one of the most important tools in determining market sentiment/psychology, designing high probability trading strategies, trailing stop losses, setting profit targets, determining trading styles and trading timeframe whether be short-term day trader or longer-timeframe traders.
3. speed of execution
Work with an online trading platform that allow instant and real-time execution of the trade. The trading platform should have all essential order types such as Limits, Market and Stop Limits; and also to look for order types that allow the “set and forget” setups. That way one does not have to monitor the computer screen during the whole trading time. This is especially important for forex trading which is a 24-hr. market and if the trading timeframe is spanning overnight and over weekend. In addition, under certain circumstance, OCO (One Order Cancels The Other Order) and OSO (Order Sends Order) orders may be useful, in which one can create multi-bracket orders to not only enter the position and place a stop loss, but also set up profit targets and final exits all ahead of time.
4. live data feed
Without live data feed, one can not do the technical analysis. Live data feed provides real time quotes. charting services and how data correlates with charts, news stream which are all essential for analysis and timing the entry and exit. For equity trading, there are level II quotes which provides transparency and insight into a stock’s price action. Level II is the order book for Nasdaq stocks. Level II quotes provide information about who (the market participants) has an interest in the stock. This information can be extremely helpful for day traders.
5. risk management
Risk management is more important than setting up an account with speed of execution and live data feed. Risk management protect the winning trades’ profits from being wiped out by one losing trade that is not risk managed. No trading strategy is bullet proof perfect that will be making the profit 100% of the time. Successful trading strategies are those with higher probability of profiting. Always stop loss a potential losing trade before it can run into a disastrous losing trades that eliminating profits. Always risk small percentages of the account and use decent risk to reward ratios. A sufficient reward to risk ratio makes it possible that one only need to be accurate 30% of the time, but still making money.
6. psychology of trading
Trading is all about discipline and keep the emotion (anxiety, fear) out of the trading. Warren Buffet has a famous saying “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. Learning to practice this “quote” in real trading will prevent being trapped in a stock or market bubble.
7. trading plan
A successful trading plan should be tailored to the specific situation of the trader: the amount of capital one can risk, the timeframe to trade, and etc. The plan should include: defined goal, daily routine, system for selecting (screening) stocks, risk management, defined trading strategy, entries and exits, methods for evaluating success.
http://www.tradingacademy.com has an introductory video for this topic – “7 pillars of trading”