8 Steps to Make a Profitable Stock Market Trade

As far as Wall Street is concerned, stock trading is wildly complicated and can only be successfully navigated by trained professionals (read: them).

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2020 hedge fund letters, conferences and more

But as someone with over two decades of experience at major global investment banks, believe me when I say the ideas that “finance is complex” and “investing is hard” are myths.

Should You Go All In On Water Like Michael Burry?

Water investments? Michael Burry was one of the first institutional investors to bet against the US subprime mortgage market in the mid-2000s, and today he’s concentrating all of his investment efforts on one commodity: water. Burry’s focus on water has attracted plenty of attention to the commodity in the investment community but trying to profit Read More


The truth is that Wall Street doesn’t have a monopoly on trading, and even if you’re just getting started, you can quickly learn how to make a profitable trade.

Here are eight simple steps to walk you through the trading process.

Determine What Phase the Market Is In

The first thing we want to do, before we even contemplate looking for trades to take, is determine whether the market is in a bull or bear phase. Are prices trending upward or downward? Generally, when prices trend up you want to buy and when they start trending down you want to sell.

The S&P 500 index is the most important barometer of risk sentiment in the world and something every trader should be watching. Keep an eye on the S&P 500 because it will give you a feel for the performance of the overall market.

Check for Any Significant Economic Reports or Earnings

Next, see if any companies are announcing their quarterly earnings. Typically, a stock will experience greater volatility immediately after an earnings report.

There are many resources available online to help you keep track of these dates. For example, each Monday, have a look at the economic calendar for the week. If there are any significant events that week, such as the jobs report (first Friday of each month), you can expect some additional volatility that day.

I also recommend checking for any significant earnings announcements. Great places to check online for forthcoming earnings releases include earningswhispers.com and barchart.com.

Review All Existing Open Positions

As a next step, review all existing open positions.

It’s necessary to review all portfolio positions every day when the market is closed. That way, you have time and can do so in a more relaxed, less emotional manner. Don’t be in a rush, take the time you need. With experience, this process will take only a few minutes each day.

When the market is open, you’ll have a plan that you can stick to that was formulated while you were feeling unemotional about the market.

Hunt for New Profitable Trades

Now it’s time to look for potential new profitable trades.

There are many charting applications you can use for this purpose, like Thinkorswim, Tradingview, StockCharts, and TC2000. Scanning for trades is a massive timesaver. Instead of pouring over hundreds of charts each day, your charting platform can scan some basic criteria for you and provide a shortlist of stocks to add to your “weeding out” list.

With practice, your trading can be done in as little as twenty minutes per day.

Refine the Shortlist

After completing your scans, it’s time to complete the “weeding out” process. It’s important to remember that scan results are only a starting point. Many of the stocks in the scan results will not be good candidates for trading. You need to learn how to sort the winners from the losers.

As you begin to make trades, I recommend going back and reviewing past transactions. Which trades were winners? Which were losers? By doing this regularly, you will over time develop a sixth sense or a “trader’s brain” for what profitable trades look like versus losing trades.

Select an Appropriate Option Strategy

Once you have a shortlist of the top one or two best-looking candidates for your trade, decide on the option you want to buy.

For bullish setups, consider buying calls and call debit spreads. For bearish setups, look at puts and put debit spreads. Take into consideration the price of the options and the amount of risk you’re willing to take on.

Place the Orders in the Market

The market is now open and it’s time to work some orders.

When you look at the options chain in your brokerage platform, you’ll see all options have a “bid” price and an “ask” price. The bid price is the price you will receive if you “hit the bid.” To hit the bid is to place a sell order for an option for immediate execution. You never want to hit the bid or the offer (the ask price) when trading options.

When placing options trades, deal at “mid,” which is the price midway between the bid and the ask.

Monitor Your Portfolio

Lastly, for long-term trading success, you’ll need to monitor your portfolio.

Ensure that you review your portfolio and your net liquidating value (NLV) as a whole. NLV is the cash value of your account if all of your positions were closed at market.

If your NLV rises over time, congratulations! You’re doing your most important job as a trader and growing your wealth.

This article was adapted from the book The Tao of Trading written by Simon Ree.


About the Author

Simon Ree has twenty eight years of experience as an active trader, investor, and financial markets professional, and has previously held senior positions with Goldman Sachs and Citibank before deciding to focus on options trading full-time in 2017.