Would You Like Increased Profits? Then Go After Decreased Losses!
Allow me to share 4 RULES for trading which directly deals with losses and if followed, can ‘plug’ many of your profit leaks!
RULE 1. Wait for the stock to CONFIRM the anticipated direction before entering the trade.
This rule can decrease the NUMBER of losses you experience. As straightforward as that sounds, it is one of the most frequently violated principles of great trading habits. So often is the rule broken that many of us are all familiar with cute little descriptions such as “catching a falling piano”, or perhaps “reaching for a falling knife.”
What you may use for this confirmation is your own decision; price rise or fall, momentum, frequency of trades or bid / ask “size” are merely a couple of ways. Personally I combine all of them (more or less), developing a ‘feeling’ for the confirmation, instead of a measurable quantity.
However you choose to define confirmation, permit experience be your best teacher here. Do not enter the trade until you are absolutely convinced the stock is going your direction!
RULE 2. When you are filled on the entry, put a STOP loss to minimize your possibility of loss.
This rule controls the Amount you can lose on any one trade. I like to use about half of the stocks daily movement for my stop loss amount. For example, if a stock price moves on average, say $1 every trading day, then I’ll back off half of that, or fifty cents and put my stop loss there. This limits the losses possibly incurred on that trade.
Whatever you use, be FAITHFUL in sticking with the protection afforded by the stop. In other words, Don’t CHANGE IT. If you are stopped, you’re stopped. He who trades and then runs away lives to trade some other day!
Equally important is allowing your profits to maximize AT THE Exact Same TIME! Here’s how you can do that.
RULE 3. When you become profitable in a trade, substitute the stop loss by using a TRAILING stop, trailing by that total amount of profit.
This one is so important that I believe it ought to be the 22nd amendment to our Constitution! Say you are up 25 cents in a trade and you have your stop loss in at 50 cents below your entry.
Exchange the stop loss with a twenty five cent trailing stop. At this time, you WORST CASE result for the trade is BREAK EVEN (give or take a few pennies)!!! On my live trading lab on my internet site, I usually refer to this as the MAGIC point in the trade. You have virtually NOTHING to lose plus EVERYTHING to gain in the future!
Finally, for the ‘do-it-yourself- investors:
RULE 4. Leave the trade alone from here on!
The market overall will do a better job of managing the trade than you or I EVER could! Once you’ve reached the MAGIC POINT with your trade, just go away and do something else. Your trade is certainly on autopilot!