Here’s What it Takes to be a Great Stock Trader

What makes a good stock trader? It’s multiple characteristics, actually. Confidence, analytics, and discipline all play a big role in creating a successful trader.

But that’s just for starters, says Real Money Columnist James “Rev Shark” Deporre. There’s more to a reliably profitable trader.

Here’s how Rev Shark explains it..

“A reader on Twitter recently sent me a note that said: ‘I don’t understand why you are long these volatile small-caps and not safer stocks like AAPL or GOOGL,'” Deporre wrote on Real Money recently. “My response to that observation is that I am confident in my ability to trade, and therefore I want to trade the stocks that have the potential to make the biggest moves so I can make the most money.”

Basically, “the small-cap names that I tend to favor, have more risk and more volatility, but they also offer much more potential profit,” he added.

(Essentially, good trading comes down to the classic trade-off of risk versus return.) – Get Apple Inc. Report

“If you want higher returns, then you have to take on more risk or have a better way to manage risk,” Rev Shark said. “I believe that if I employ an effective trading methodology and stay disciplined, then I will do far better trading high volatility small-caps rather than holding onto a big-cap name.”

Every day, Deporre studies a list of stocks that are moving more than 10% that day. The big names like Apple   (AAPL) – Get Apple Inc. Report  and Alphabet  (GOOGL) – Get Alphabet Inc. Class A Report seldom make daily moves of that size, but there are usually at least 30 stocks that move more than 10% in a day. The risk of trading them is high, but the rewards are great if you do it right.

That’s where good trading skills can take a trader to the top.

“Every trader needs to decide what trading vehicles they will use,” Deporre noted. “Some focus just on indexes and watch every tick in the futures. There are some that prefer to trade highly liquid big-caps that are common household names. It’s easy to buy and sell these stocks, and if you are personally familiar with them, the risk doesn’t seem as great.”

Rev Shark also believes that fundamental and technical research can provide him – and any trader – with a better edge in a stock that isn’t followed by 100 analysts.

“There is nothing I can find out about an AAPL or a GOOGL that big money doesn’t already know,” he said. “Perhaps I can apply some psychological insight or use the chart to manage a trade, but I don’t have any substantial edge over others that are trading the stock.”

Yet most people have no idea how to find a good unknown small-cap or how to research them. That gives Deporre an edge right there.

“With a small-cap name, there is often substantial manipulation and a large disconnect between valuation and the market price,” he said. “My edge is that I can look for ways to profit when the gap closes.”

Ultimately, what works best in trading is highly personal and will depend on risk tolerance, the amount of time you want to spend on research, and how closely you want to watch the market.

But if you want to be a successful trader, you need the right weapon.

“Small-cap stocks are my choice because I believe they offer me the best opportunity for large gains with less risk if I use good discipline,” Deporre said. “There are always periods when your preferred weapon will be suboptimal, but that is just the cyclical nature of the market. Find the right weapon and then learn how to use it.”

Please note: It is important to remember that you should not buy or sell a stock based on reading one article. Investors should do their homework. For more research and information, consider TheStreet Quant Ratings for a quantitative approach to stock selection. Or, get a daily dose of TheStreet’s smartest insights from its smartest analysts, delivered to your inbox daily via TheStreet Smarts.