Five steps to successful investments

What prevents the average investor from making a profit? Perhaps it is difficult to single out only one problem, here are emotions, lack of a system, experience, as well as hundreds of other factors. British multi-millionaire hedge fund manager Lex van Dam gives five clear steps to wisely acquire assets in the financial markets.

Proper formation of a trading idea

Most private investors adhere to the belief system that the market moves naturally in one way or another. Moreover, the direction can be predicted based only on technical or fundamental analysis. Unfortunately, not everything is so simple. Lex van Dam in an interview spoke about his work as a market maker in the worlds largest bank - Goldman Sachs. It was during that period that he realized the reason for the irrationality of market movements, buying or selling assets for his clients, regardless of the growth or fall of quotes.

Nevertheless, the unpredictability of price changes does not mean that it is impossible to make money on the market. It is only necessary to reconsider your views on the formation of a trading idea, which will now include not only fundamental and technical factors, but also a deeper look with an understanding of the “rules of the game”. It is worth being more interested in the behavior of large investment companies associated with the traded instrument.

Accounting for economic reality

Lex does not deny that it is possible and necessary to follow the news, and this is the second step in his system. The main thing is to analyze the reaction of investors to events. Not always negative statistics lead to a fall in prices, which, in turn, indicates the presence of some stronger motives for the purchase of an asset by large participants.

From the foregoing, it follows that the investment option is most preferable when the price actively and reasonably reacts to the fundamental background. This approach significantly increases the chances of making a profitable trade.

View price charts

In this case, we are not interested in the technical models described in classical textbooks, but in the time factor. A good trade involves timely entry and exit from a position. Lex van Dam emphasizes precisely the importance of timing for open trades and key levels for closing on a stop order.

As a result, one should clearly understand how long the instrument moves in one direction, what price levels are interesting for investors. In addition, it is recommended to consider large time intervals (daily and weekly charts) to understand the global picture of the market.

Focus on psychology and self-understanding

Oddly enough, but the psyche plays a decisive role in working in the financial markets. The fact is that a person is constantly overcome by either fear or greed when prices move up and down. The contrast of emotions quickly unbalances even the most disciplined person. Therefore, in the fourth step, Lex draws attention to the importance of mental attitude.

Psychological resilience requires experience, which can be accelerated by testing your ideas on simulations or historical data. It is important to bring the training as close as possible to real trading and conduct them systematically. This method works in many activities, as a result, over time, a person gains confidence in the ability to cope with the tasks.

Building an investment portfolio

Lex van Dam doesnt stop at what assets to trade, but talks about the importance of risk reduction. Any investment plan is based on possible losses per day, month, year, etc. This area is called risk management, there are even highly specialized specialists in this field. The basic rule is that you should not risk more than 2% of your capital on a single trade idea, and that the potential profit should exceed the loss.

In addition, it is necessary to study the practical application of diversification and hedging of positions. The first involves opening deals on several different instruments, which increases the likelihood of a profitable outcome for at least one of them, and as a result, reduces the risk. The second is the use of multidirectional positions both for sale and for purchase, which practically guarantees the absence of losses, but also reduces the amount of profit.

Get the final algorithm of actions:

• to realize the irrationality of market movements due to the conflict of interests of large participants;
• monitor the economic situation and the reaction of investors to events;
• pay attention to the charts to determine the time frames and zones for exiting a position;
• to provide psychological preparation for future trading operations through training;
• Create an investment portfolio correctly, taking into account risk management, diversification and hedging of positions.

What advice would you give to novice investors?