There are two ways to lose on a trade:
Lose like a loser Lose like a professional Which do you think you’d prefer? If you learn how to lose, you can potentially learn how to WIN.
Never, never, never EVER go into a trade without a predetermined “uncle” or exit point. EVER…Set a predetermined stop-loss point or market level at which you will close the trade…Period…If the market hits your stop-loss or gets to your exit point, get out. While this may sound simple, it is simply amazing how many traders and investors cannot follow this very simple rule.
Never risk more than one to two percent of your account value on a single trade. By keeping your per-trade risk to a minimum, you can help ensure that even with a string of losers you will still be in the game.
Professionals recognize that losing streaks are part of the game. They further recognize that losers are part of the game, and with every loss you may potentially be that much closer to your next BIG WINNER.
Losing like a professional entails these two simple rules. These rules are so simple, in fact, that a five year old could likely be trained to follow them.
TRADING QUOTES YOU SHOULD WRITE DOWN
Grab a pen and some note cards. These quotes are worth writing down.
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
– Warren Buffett
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
– John Bogle
“The individual investor should act consistently as an investor and not as a speculator.”
– Ben Graham
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
– Warren Buffett
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
– Phillip Fisher
“Know what you own, and know why you own it.”
– Peter Lynch
“Investing is the intersection of economics and psychology.”
– Seth Klarman
“Buy not on optimism, but on arithmetic.”
– Benjamin Graham
“A business that makes nothing but money is a poor business.”
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
– Warren Buffett
The Trading Plan Broken Down
All investment plans can be broken down into these simple components. Any strategy and time duration of investment fits this disciplined evaluation.
1. Identify High Probability Candidates
2. Execute with Proper Risk Control
3. Manage Position
4. Maximize Trend
The process of identifying investment candidates has one goal in mind…to raise the probability of success and give a trading edge. Many types of analysis are used to choose investments and timing possibilities. It is important to employ a methodology that can be repeated and is not just luck in the marketplace.
Technical indicators are often used to select opportunities and filter out potential bad choices. There is also the whole aspect of fundamental analysis to choose investments. Regardless of what type of selection process it is important have a reason to enter or exit the market without emotion. Trading is NOT gambling but rather a science of putting probability in your favor.
Once a candidate is identified and thoroughly researched, the most crucial component of investing is implementing Risk Control. A plan needs to be made in advance to determine an exit strategy if the position moves against you possibly with a simple stop loss order. At the same time, profit objectives can attempt to eliminate greed when you are on the right side of the market.
Not only should you quantify your dollar risk in proportion to the overall portfolio but also how much of the account should be allocated to a trade. Professionals focus on risk, something they can measure and use techniques to control exposure. They often evaluate the worst case scenario in the plan and make sure it is line with acceptable risk. Most find that it does not make sense to risk a large dollar amount or percentage of a trading account on any one investment.
One question to always ask: How is this trade going to impact my investing? If you are comfortable with the risk in proportion to the overall account for an individual investment you can move forward to execution. Put yourself in the position for success by knowing what you are willing and able to lose prior to entering the market without having significant negative impact on your overall portfolio.
After the candidate research has been done and a risk management plan has been put in place it is necessary to manage the position. Every investor is going to have different objectives. Some want to make a certain dollar amount or percentage return. Others may have higher goals and are willing to take greater financial risks in return. Managing a trade is personal but some basic common sense is consistent.
Once in a profitable position, some traders are eager to trail their stops losses quickly to lessen risk. There is a balance between moving a protective exit order too close to the current trading market and leaving too much dollar risk. The simple rule of not letting a winning trade turn into a loser applies to everyone to different degrees based on their individual trading personalities. For many it makes sense to bring the stop loss to break even whenever possible.
This can ensure that the trade does not turn into a loser in a worst case scenario but also can increase the chances of being taken out prematurely. Others may want to continue giving exit stop loss orders on a position plenty of room so they can maintain a long term position and not be knocked out with the market fluctuations. The risk on a wide stop order to exit can be a significant dollar loss.
A nice problem for most traders is deciding when to take a profit. That is why objectives are often identified prior to entry to set rules for exit. Initially it is often good to learn to take small financial gains in order to develop trading discipline and confidence in your methodology. Personal goals can be increased over time as the overall account and individual position sizes grow. It is important is to learn the process of executing a solid trading plan.
To maximize the trend it would be necessary to buy at the low and sell the high. Realistically it is impossible to capture that entire market movement. In reality, only a piece of that overall move needs to be captured for a successful trade. As investors gain market experience that piece of the trend can increase.The key to success is trading discipline. It actually a very simple process: Identify, Execute, Manage and Maximize that is repeated for all investing vehicles over different time frames.