There are different interpretations of success, reaching form "participation is everything" to attainment of wealth and fame. Let us take the same range of interpretation for trading/investing then it would read as follows: "Success is making money" to "success is attaining wealth".
Trading is a professional business and professional attainment is measured on score cards. Fund managers performance for example is measured in how close the fund performs to the referring index. For funds, which relate to large caps or the overall stock market, the S&P 500 index is generally used as the base line. If you want to do the same as a private investor, take SPY: The ETF of the S&P 500, which has a year-to-date-November-2013 performance of 27% growth.
If your trading/investing account grew with the same rate of return, you met the index. In case you run on a lower return rate, you are in good company, because most of the fund managers: Mutual Funds, Exchange Traded Funds, Hedge Funds are not achieving the average fund performance either; only a small number of funds is beating the S&P 500, where the best in class run at double the return rate of the S&P 500 (We will report separately in giving you a detailed overview on Hedge- and Investment Fund performance).
Let us take a look at the top 10 stocks of the S&P 500 and their year-to-date-November performance:
1 Exxon Mobil Corporation Common (NYSE:XOM): 8.0%
2 Apple Inc. (NASDAQ:AAPL): -1.1%
3 Microsoft Corporation (NASDAQ:MSFT): 42.6%
4 Johnson & Johnson Common Stock (NYSE:JNJ): 32.2%
5 General Electric Company Common (NYSE:GE): 25.8%
6 Google Inc. (NASDAQ:GOOG): 43.7%
7 Chevron Corporation Common Stock (NYSE:CVX): 10.8%
8 Procter & Gamble Company (NYSE:PG): 21.6%
9 Berkshire Hathaway Inc. Class B(NYSE:BRK.B): 24.2%
10 Wells Fargo & Company Common Stock (NYSE:WFC): 26.0%
Take a look at the Berkshire Hathaway Fund performance in relation to the S&P 500: -2.8%, which would be seen as an average good performance for fund managers. However, had you bought SPY-shares, you would have been better on.
How can you do better than average and most important, how will you be able to produce wealth, when the markets might not give such a positive development in 2014?
You need a trading or investing system, which shall give you the following:
Seven Critical Elements of a Trading System
- Flexibility to trade/invest in various assets. Why various assets? In case stocks halter, institutional money might flow into assets like commodities, currencies, treasuries and you should be prepared to participate in institutional money moves when they happen.
- A system, which lets you produce income if the markets move up, down or sideways. In average, markets drop with three to five times the speed they grow. Hence, you should be ready for applying short trading strategies applicable to all kind of account holdings: IRA, 401(k), Cash, Custodian, and Margin.
- Clearly defined entries and exits: Institutional money is moving the markets and institutions leave their trace of directional intends. With the right trading system on hand, you can spot and trade along with those actions. Focus on spotting and trading along with institutional money moves, produce constant income and reinvestment. Such method makes you independent from picking the right stocks with long term growth. Imagine, you were able to win two out of three trades, with an average trade duration of four days, aiming for a 1.5% return/trade, making income to the up- or downside; then you are striving for an annual return of 62%, regardless of the directions the market take. If you can apply this method successfully, you will beat the best hedge fund managers of the world by far.
- Risk management: Professional traders have clear guidelines of how they act. As a private investor/trader, you need the same: Define the odds ratio for every trade and adjust the lot size of your investments to hedge and leverage your positions accordingly. Have trade repair strategies in place, helping you to turn potential losers into winners for all account types.
- Have a method to spot key assets on the move. Never fall in love with a stock or asset. No stock has to grow. The performance of an asset is the result of supply and demand. Apply a system which helps you to visualize when changes in supply and demand occur in an asset and be part of the directional move.
- Journal your performance to see where you do well and where you have needs for improvement. Pros of every genre: Sports, theater, movies, trading, do this and you need to do the same to strive for constant improvement and long-term trading success.
- Clear cut documentation for every trade situation and asset, so you can always go back to the drawing board for revisions.
Get prepared: Those who fail to prepare, prepare to fail