Articles Library |Trading Psychology Articles |Written by NetPicks |

1. CommissionsHow much commission do you pay per trade? You should know thisanswer without hesitation. Is your commission competitive andreasonable? That might have a number of different answers.
How much you pay for commissions is critical. Before we start it'simportant to acknowledge that reliable and quality fills are equally asimportant, that customer service when needed and a well-designedtrading interface are also critical to an active trader. So don't letwhat follows mean we think you should just pursue the very lowestcommission charge. That's not the case, but you should be sure you aretrading with a firm that is very competitive in all areas -commissions, service, fills and trading platform.
Let's take an example. What if you had a trading system that in 100trades would "win" 80 times. That's a fairly spectacular 80% win ratio.If you were told you had a guarantee to win 80% of the time, chancesare you wouldn't hesitate much more than the time it takes to hit"Submit" to place your first order. But do you realize that it can befairly easy to actually lose money, even with a system that wins 80% ofthe time?
Assume that you decided to trade 50 shares per trade and each stockaveraged about $20. Your target is 5%. And sure enough, your firsttrade "wins." So your $1,000 investment makes an easy 5% and you made$50. That was fast. Unfortunately you trade with a broker who charges$24.95 per trade - suddenly your winning trade actually barely squeaksout $0.10 in profit. You can imagine what happens with a losing trade.
Now let's say you traded that same set-up but only paid $5 per trade(very doable) or $10 per trade. Granted you still would take a bit outof your profits but at least in this situation your big $0.10 winnerturns into a $40 or $30 winner.
You're saying, "Well, I trade a lot more than 50 shares" and if thatis the case, you are definitely helping yourself because the commissionis a "fixed" amount in most cases. And therefore the more shares youtrade as capital into the market, the more your "fixed costs" willactually go down. The trader who trades 200 shares instead could makeover $150, even with that high commission. But the trader paying $10 around turn adds another $40 - a big increase on any one trade.
Start adding it up over the number of trades you might make with anactive strategy. If you traded five times per day - both in and out -and instead of paying $25 for a trade you paid $10, you could actuallysave or add to your wallet $39,000 in one year. Let's not even start tomention how much that savings can turn into in compounded gains. Evenif you traded far less frequently, or didn't save quite as much, itmakes a major difference.
The key here is to be very sure you are paying a competitivecommission. Be very sure you are trading enough shares per trade. Don'ttry to trade every set-up and have to spread out your equity so farthat your commissions keep eating away huge chunks of your gains. Youhave to be able to accommodate for the losing trades, slippage and evenerrors you might make. This is why keeping your costs low when activelytrading is important. And remember, these costs are fixed - if youtrade more shares, it won't cost you any more and your cost of doingbusiness only goes down for each share added.

2. The Power of CompoundingNot everyone can start with a sizeable account and not everyone iscomfortable (even those with large accounts) to have substantialcapital at risk. The power of compounding is very important for anactive investor to understand. An active investor has the advantage ofeach day being able to compound their overall profits into the nextseries of trades and grow their overall capital base quickly if thetrading is successful. It is much like a manufacturer who measures"turns" in inventory. The more turns the better. They are using theircapital more favorably than slowly turning inventory.
The active trader can do some great things using compounding andeven start the cycle at a level they are most comfortable with and inthe future use profits to continue to increase position sizing.
Let's take a look at an example. Let's say that you traded $10,000per trade, made 5% on every trade, and did this ten times in a rowwithout a loss. Sounds pretty great (ok, not that achievable but comewith us on this journey!) -- but this time you always take your profitsout and keep trading $10,000 each time. Well, we know you'll make $500per trade and ten winners = $5,000 in profits. Very nice.
Now, let's say you decide to compound these gains and each time youtrade you trade all the capital you have - you reinvest your gains. Soten trades that win 5% and you do not take your profits out. This timeyou actually profited by $6,288 - an improvement of 25%. You didn'trisk any more - you started with $10,000 in risk capital in both casesbut instead you decided to continue to reinvest your gains to build upyour account - and without any more initial risk you added 25% to thebottom line.
This is a convenient example - there will be losing trades, therewill be trades that don't make full targets and so on. But you can usecompounding to start with a comfortable level of risk and let marketprofits guide you to a larger account base and faster growth in equity.Not to mention that when you have a loss you actually scale back yourrisk since you only trade the equity available, making it a great wayto ride out more difficult markets as well.

3. "I Always Miss the Winners"That is the fear of the trader who looks at a list of potentialtrades and feels that they need to trade every single set-up for fearof missing the "big" one. First, in our type of active trading we'renot looking for home run shots. We're looking for steady gains - weknow some market months will be easier than others but we're notlooking to make or break it off any individual trade.
Next, we learned above how important it is to trade enough equityper trade. Otherwise you'll let commissions eat away at your profitpotential.
We also know that it is very difficult, no matter how good yourtrading platform, to track and trade a long list of stocks. You aremore likely to make costly errors on the entries and exits.
And it simply is not necessary. Many of our subscribers only focuson a smaller subset of stocks. The magic number is up to your comfortlevel but literally any mix will work fine. 3, 5, 6, 8, etc... Do notfeel you will miss something by not trading all the set-ups. You aremuch better off trading fewer set-ups each day and doing themcorrectly, and doing them with enough equity to make the potentialprofits worthwhile, and it will make your life in managing much easier.
You might want to take into consideration which sector/industry astock trades in. If you trade a smaller subset of stocks from the list,you might want to avoid trading stocks that all trade in the samesector. We know on certain days all storage stocks or all chip stockswill move together as a sector. By mixing your sectors you have lesschance of getting caught on those days when one whole sector movesagainst our trades.

4. A Trader's Fantasy - and NightmareWe consider nice, smooth trending (up or down) markets a trader'sfantasy. They are simply the most cooperative markets to trade andthankfully several times a year or more the markets simply trend formany days in a row and sometimes for weeks at a time. These are themoments we "live" for.
Now choppy markets on the other hand can be a trader's nightmare.Not always, but there is no denying that a choppy market is moredifficult to trade. Actually, a choppy market that is narrow in rangewhen compared to the prior history is the most difficult. A choppymarket with sizeable trading range can work out quite nicely.
What we do know is that the fantasy always comes after thenightmare. The longer the nightmare, the better the fantasy. You canlook at any daily chart of the markets - take a QQQ or SPY, forexample, to see a big picture view, or any of our individual stocks -and see that there are periods where they are on a run - up or down.That's where your profits typically add up fast. The other times you'llsee that the markets have no pattern. No trend, little range and theyseem to fluctuate direction nearly by the day. Those markets havepockets of opportunity, but if you can make it through there without ascratch you are doing extremely well. Because move forward on any chartand see the run begin thereafter.
And our strategies catch all the runs. It is simply a matter of being patient while the market chooses to be less giving.
The trader who diligently follows the plan always catches the run.