It's Your Money, Take Control !
My sincere effort is that at least everybody who trades or invest in Stock Market should follow these sixteen rules. Taking control of the management of your money in today’s world is perhaps one of the most financial imperatives facing us all. This checklist should serve you well, and possibly keep you from becoming a victim of the market and false media information.
In my fifteen plus years of experience, I have found these rules to be an invaluable way of keeping me focused on the trade.
Set objectives before you ever buy. Define all outcomes – not only what you will do when it goes right, but what you will do if you are wrong. Determine the amount of capital you are willing to lose and conversely, define when you will take profits. Letting the market take away your profits by holding on to a losing trade is not a good strategy. Write out a trading plan on paper and follow it. Do not become a causality of emotionally involved buying or selling. Trade with a plan.
To select trading vehicles you must have a predefined method. Select a method based on price momentum and trend. Don’t guess what the future is going to be, trade the current trend direction. Your method must consider your individual time frame and risk tolerance. Always address liquidity, sector rotation and technical factors when screening stocks.
Never buy a stock without looking at a chart of the stock first. Look at the one year trading range. Ascertain where you currently are in the trend and what that trend is. Also determine if the chart reflects a stock split. Never trade against the trend. Buying and selling decisions are technical in nature. Fundamentals will never tell when to buy or sell a stock. Always look at a chart for entry and exit timing decisions.
Your probability of success are far greater if you stay with a definable market trend. Statistically, these trends provide better profit potential with a lower amount of risk. A good rule of thumb is to watch a 50-day exponential moving average of the close. This moving average represents the intermediate trend of a stock. A 12-day exponential moving average represents short term trend. The use of these two moving averages should yield excellent results in keeping you in the trend. If you perceive the trend beginning to change, act accordingly by taking profits or placing stops to protect your capital and locking in a profit.
- Cutting a loss quickly (in case of stop-loss) is the best money management you can have. Too many times traders fall in love with the stock, holding on as the stock begins to decline. Never use a hedging strategy, such as options, to justify holding on to a losing position.
- Covered Call options may be an appropriate way to generate income for your portfolio to offset losses. Be careful here because you can write covered calls into oblivion. If the stock is going against you sell it.
- If you are going to hold a trade overnight, never risk more than 3% of your available capital. If you are going to day trade, an excellent rule of thumb is to only risk 1% of your capital in any one trade.
Many times you won’t feel quite right about a buy or sell decision. If this feeling persists after you have done all your research and you have followed the rules to this point, don’t take the trade. Too many times individuals try to rationalize a decision. Don’t try to find a good reason for making a bad decision. Your decision must be a confident one.
Stay with major markets and stocks with the millions of shares in the float. Make sure the average trading volume is enough for you to sell all of your position on any given day. Don’t buy stocks trading at the lower end of the price range. Generally speaking, don’t buy stocks that don’t have good trend characteristics or predictability. True professional traders avoid them and so should you.
More money has been lost on hot tips. If someone tells you about an investment or trade, research the recommendation before you put your money into it. Most novice investors and traders fall victims to tips every day. Please don’t fall for the story no matter how good it sounds. Always use technical analysis to make your buy and sell decisions and buy or sell based on facts.
If your timing decision was wrong on an aggressive stock, don’t make the problem worse by trying to buy a stock that is going lower. The probability is that you will only compound the loss. I call this technique disaster cost averaging. Don’t buy a stock until the trend is evident.
Many people enter the stock market focused only on the profits and don not consider the losses. If you think for the one minute you are going to win one hundred per cent of the time, you are wrong. Losing is just part of the cost of doing business. Your goal is to make sure you control the risk and not blindly put your money at risk. You must come to the realization that you will never learn how to win until you first learn how to lose. How you handle your loss psychologically is truly the difference between an amateur and a professional. Professional traders don’t react the same way as an amateur to loss. When a professional trader loses, he or she simply says next. They don’t take the loss personally.
The proper use of stops will protect profits and limit your losses. Look at stops as profit and loss insurance. When you enter a trade, you place a stop to limit the loss in case the trade goes against you. When the trade becomes profitable, you use them to lock in profit.
Anyone who would argue against risk control by discouraging the use of stops is a fool indeed. In effect, they are saying you should put your capital at unlimited risk. Does this make any sense to you? Of course not, but that is exactly what a buy and hold investor does all the time. Most investors do not use stops because they are afraid of being stopped out. This is a psychological problem of not wanting to be wrong, or having to admit to yourself you lost on a trade. It certainly isn’t based on logic or strategy. Remember, always use stops if you are carrying trade overnight.
Make the time or suffer the consequences. If you are too busy to manage your money, maybe you are too busy. Take a look at your trading journal and if you lost half of your money without knowing it, you can congratulate yourself on being too busy. Was it worth it? Probably not. You must take the time to educate yourself and take control of your future.
Making money safely takes time. The only time to hurry is when you’re in trouble. Remember, “Every day is not a trading day.” Only trade when the sector, market, and the correlating stocks are in trend. Just because you want to trade doesn’t mean you should. Only trade when the probabilities are in your favour and let the market come to you. The market is going to do what it is going to do and what you want is irrelevant. Don’t become addicted to the action. You are not an action junky. You are a high probability trader. Profits are made the old fashioned way, one trade at a time. Be patient and make time your friend instead of your enemy.
The most successful traders and aggressive investors learn from their mistakes. Many even go as far as writing down what went wrong and analyzing the problem. Mistakes can be costly, so use them as learning experiences and don’t make the same mistake twice. Unfortunately, a large number of people are doomed to make the same mistakes over and over again. This behaviour is usually a sign of emotional reactions to price momentum and the absence of any well thought out strategy. The best education was to learn from the mistake of others. Most people fail in the market not because of technology or a lack of information, but because of emotional reactions and never learning from their mistakes and the mistakes of others.
Markets do not go up all the time. Common sense says you are to follow the trend. So if the trend has been down why haven’t you be shorting stocks? The reason is sadly fear and ignorance. Markets and stocks fall 70% faster than they rise. In other words, shorting stocks tends to compound money faster than buying stock to go long. Fear and ignorance must be overcome because you must know how to short.
Always remember, there is never any guarantee of success. But if you’re properly educated and develop the correct mindset, you have a major advantage. Don’t become one of the sheep led to the slaughter by media nonsense. You must make your fortune and control your financial destiny.
Always remember, it’s your money. Take control…. and follow the rules.
How to Manage the Emotional Highs and Lows in Trading
In order to manage your emotions effectively when trading, you need to create a written plan that you can review regularly to stay focused on your goal of trading success. By writing down your plan, you put yourself in the top 3% of individuals who have written goals and plans, giving you an immediate edge on most traders. Make sure you have answered these questions:
The key to good entries is putting on trades where there is relatively low risk compared to much higher reward. You should also write down clear catalyst for the expected stock move.
You should define an initial stop point for your trade, at the point where the trend is invalidated. You will also need a “trailing stop” technique to protect your profit.
I like to use limit orders, good for the day only, while exits are often market orders. Why? Because limit orders allow me to define risk and reward clearly on the entry of the trade, while when I need to get out, market orders allow immediate exit compared to the risk of missing my exit with a limit order.
There are economies of scale as you increase the amount of capital you trade with. Costs related to commissions, quote systems and equipment begin to diminish as the percentage of capital invested goes up.
The amount of capital I typically use is 10% per trade in my own accounts. I know traders who commit anywhere from 5% of there account per trade to 20% of their account per trade. For example, if you invest 20% of your portfolio in a trade, a 10% loss on that position would lead to a 2% loss on your portfolio.
I like to concentrate my portfolio on my best ideas, plus I like to stay focused on how each stock is acting. If my portfolio is too big(I’d say more that fifteen stocks is too many to focus on), then I will lose focus and invariable miss an exit on a trade that I should have previously exited.
In my training journal, I note daily observations, particularly related to my ability to execute my trading plan. I also commit to doing a post trade analysis every month. I note what I did right and wrong, and seek to learn from mistakes to minimize future errors in similar circumstances, while also looking for winning patterns where I seek to repeat big successes.
I suggest you have an end of the day routine to close your day. Review your trades, and assess if you followed your plan. Keep a log of all your trades, and make comments on each position.
You need defined time to prepare for the next trading day and build up your trading confidence. I prepare after the close for the next trading day’s trading, which allows me to formulate a plan of action before I get into trading for next day. This keep my trading proactive rather than reactive.
Most traders mistakenly think that commissions are the number one factor they can control. In reality, commissions are a small cost compared to the broker’s effectiveness at executing your trade. Your focus should be finding a broker who gets you speedy and fair execution of your orders.
Once you have defined these facets of your trading plan, you are in an excellent position to have a strategy to control your emotions when trading. Make sure to review your plan on a regular basis to create effective trading habits.
Psychological Issue in Trading
Why do we let losses ride and cut profits short? Perfectionism tends to keep traders from taking their losses quickly, as they are too concerned about looking good to others and not wanting to admit they are wrong. But does the market care about where you bought the stock? NO! The market is going to go wherever it wants to go, and your job is to see that trend, recognize when you are not in tune with it, and get out of such trades.
We all have this tremendous desire to prove ourselves right. But in the markets, we should concern ourselves more with making money than the amount of times we proved right. This means winning ideas need to be ridden longer than average, while losers need to be cut short quickly. Our school training says there is one write answer but in the stock market there are many ways to win.
Trader is obsessed with so called “Perfect Entry”, “Perfect Exit”, “Perfect Stock” & Perfect Time”. Perfectionism cannot only keep you hanging on to losers too long, it can also keep you out of the best performing stocks. One way to be less of a perfectionist is to set one goal and make it process oriented.
Traders usually suffer from the fear of trading after a string of losses, many traders experience at one time or another. The reality is that human beings tend to do things that either maximize pleasure or minimize pain. Not pulling the trigger on trades becomes a way for traders to minimize pain, because mentally, the thought is that we are not causing ourselves any more damage if we do not trade. The problem is that we then remain stuck in a state of fear until we can trust our method again and start taking trades. That is why it’s so critical to have a trading plan that is tested, one we’ll be able to stick with it. The game plan for getting yourself back on track:
- Define Your Trading Plan.
- If in Doubt, Get Out.
- Measure Your Results.
In trading as in life, how you think determines the result you achieve. Many traders are filled with doubts and a lack of self-confidence, so you need to coach yourself through tough times with positive and self-motivating beliefs.Check to see if you possess the traits and beliefs of winning traders, including:
- My trading objectives are perfectly clear, and I truly believe I will achieve these goals. If you have the belief that you will win, you increase your chances of trading to win. In order to have this level of conviction, you must have a thoroughly tested plan.
- I have created a plan to achieve my trading goals.
- I prepare my plan before the trading day starts.
- I regularly monitor my trading results to measure my progress toward my goals.
- I quickly discard negative emotions that can hurt my trading results.
- I am focused on the market during the trading day, and not easily distracted by non-market activities during trading hours.