3 Tips for Winning Trading

05/20/2011 3:00 pm EST

Focus: STRATEGIES

Joseph Fahmy

Managing Director, Zor Capital, LLC

Trading is a difficult journey, but veteran Joe Fahmy shares three basic rules designed to get any trader on the right path in developing habits that promote success and longevity.

We're talking trading with Joe Fahmy. Joe, it's a pleasure to have you. Let me ask you about the three trading tips you would suggest traders follow?

OK, I have so many rules, but the main ones I like to tell traders is number one, you have to work hard at this. This is not a joke; you don't want to dabble in it.

A perfect example is I play golf three months of the year in the summer when it's nice. I start to get good and then I don't play for nine months, and then I come back the next year and I say "Why am I not good at this?" It's because I'm not working at it.

The same thing goes with trading. Anyone can get on their computer, start an online trading account, and trade tomorrow, but that doesn't mean you're going to be good at it.

I suggest (that traders) study success. Find a trading style that you like, work hard at it, and study people who have been successful at that style in the past.

Would you say devote eight hours a day to it, and do you have a strategy in terms of how you start the day and a discipline that you stick with?

It depends if people trade full time. A lot of people are at their jobs and they like the market, so it really depends.

If you trade full time, I think you should spend an hour or two every night reviewing your trades, preparing yourself for the next day.

If you work and you have a full-time job, over the weekend, spend a few hours reading some good trading books, as well as studying some of the more successful traders from the past.

What about your second tip?

Second one is cut losses. I've studied hundreds of very, very good traders. The one theme that all of them across the board say is "Cut your losses."

Just like in real estate, when the top three rules are "Location, location, location!" A lot of the best traders say "Cut your losses, cut your losses, cut your losses!

No matter if you trade short term, medium, or long term, you have to cut your losses and protect your capital.

How about the flip side, do you let your profits run really?

Yeah, you should. I find the stocks that are most profitable right away are the ones that usually work well, and you should give them some room to hopefully let them turn into big winners for you.

NEXT: Rule #3 for New Traders to Follow Closely

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What's your last tip that you can share with me today?

Last rule is protect your confidence.

What do you mean by that?

I believe that 90% of trading is psychological. It's so important to protect your confidence.

I have so many friends that, especially in a market correction, they lose a lot of money, and then when the market bottoms and that's the time where you should be taking advantage, they've been beaten up so much.

They might normally buy 1000 shares of a stock, but they say "I don't want to. Maybe I'll buy 100 because I'm so beat up," or even worse, they don't want to buy it at all.

I think the best way to protect your confidence goes back to rule number two, and is cut your losses.

What affects confidence is when you're losing money. No one ever says "Oh, this market is making me so much money and I don't want to be in it anymore." They don't want to be in it because they've lost money and that affects their confidence.

So it's also important to focus on the positive, focus on your good trades, learn from your mistakes, but always stay mentally tough as a trader.

The importance of timing in your confidence, how does that play out? You might have the perfect set-up, but you just got in a little early.

I'm not afraid to get into a trade a second time, so if I do get in early and I might get stopped out or I'm wrong, I'm OK. Sometimes you have to be patient and stocks will come back and they'll set up again.

That's when that confidence comes back.

Yeah, as long as you protect your confidence and you have that mental toughness, you can try a stock three or four times and it won't matter.

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