I saw this on facebook, and so cut and shared with readers. I know many of us like to trade for better returns than the interests on our bank accounts...
so bear in mind these 40 bits of wisdom.
Remember, protect your capital, and profits will take care of itself...
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All
of the successful traders we know blew out their account at least
once before becoming consistently profitable on an annual basis. (Or
monthly, or weekly, depending on their goals and trading style).
These "bits" are not meant to make you a conservative or
hesitant trader. On the contrary, trading takes guts, and by
following these "bits of wisdom" you are being given the
key that will allow you to embrace risk and take the necessary
chances required in the pursuit of capital gain. That is, you will
feel more compelled to take a chance, because you know you are also
going to fight to protect your capital. You won't freeze and lie
helpless as it is whittled away.
This
is the greatest business in the world. By following the bits of
wisdom below we hope that you can stay in this business as long as
you choose.
40
Bits Of Wisdom
Trading
is simple, but it ain't easy. If you want to stay in this
business, leave "hope" at the door and stick to your
stops.
When
you get into a trade, start looking for signs right away that you
are wrong. If you see them, then get out before your stop is
hit.
Trading
should be boring, like factory work. If there is one guarantee
in trading, it is that "thrill seekers" get their accounts
ground into parking meter money.
Amateur
traders turn into professional traders when they stop looking for
the "next great technical indicator" and start controlling
their risk on each trade.
You
are trading other traders, not the actual stock. You have to be
aware of the psychology and emotions behind trading.
Be
very aware of your own emotions. Irrational behavior is every
trader's downfall. If you are yelling at your computer screen,
imploring your stocks to move in your direction, you have to ask
yourself, "Is this rational?" Ease in. Ease
out. Keep your stops. No yelling.
Watch
yourself if you get too excited - excitement increases risk because
it clouds judgment.
Don't
overtrade - be patient and wait for 3-5 good trades.
If
you come into trading with the idea of making - big money, you are
doomed. This mindset is responsible for most accounts being
blown out.
Don't
focus on the money. Focus on executing trades well. If you
are getting in and out of trades rationally, the money will take
care of itself.
If
you focus on the money, you will start to impose your will upon the
market in order to meet your financial needs. There is only one
outcome to this scenario: you will hand over all of your money to
traders who are focused on protecting their risk and letting their
winners run.
The
best way to minimize risk is to not trade. This is especially
true during the low-volume -chop and slop- found during the
afternoon trading session between 11:30AM Eastern and 2:30PM
Eastern. If your stocks are not acting right, then don't trade
them. Just sit and watch them and try to learn something. By
doing this you are being proactive in reducing your risk and
protecting your capital.
There
is no need to trade 5 days per week. Trade 4 days per week and
you will be sharper during the actual time you are trading.
Refuse
to damage your capital. This means sticking to your stops and
sometimes staying out of the market.
Stay
relaxed. Place a trade and set a stop. If you get stopped
out, who really cares? You are doing your job. You are
actively protecting your capital. Professional traders actively
take small losses. Amateurs resort to hope and sometimes prayer
to save their trade. In life, hope is a powerful and positive
thing. In executing a trade, hope is a virus that can infect
and destroy.
Be
right on day one or get out. Don't take a red position home
overnight.
Keep
winners as long as they are moving your way. Let the market
take you out on a trailed stop.
Money
management is the secret to success. Don't overweight your
trades. The more you overweight a trade, the more hope comes
into play when it goes against you. Hope is to trading as acid
is to skin. The longer you leave it in place, the more painful
the outcome will be.
There
is no logical reason to hesitate in taking a stop. Reentry is
only a commission away.
Professional
traders take losses. Being wrong and not taking a loss does
damage to your wallet, mind, and soul.
Once
you take a loss you forget about the trade and move on. Especially
if it is a small one. Do yourself a favor and take advantage of
any opportunity to clear your head by taking a small loss.
You should never let one position go against you by more than 2% of your
account equity. This means if you have a $50,000 trading
account, you should never let one stock turn into a loss of more
than $1,000. This means if you max out your 2 to 1 margin
account and buy 2000 shares of a $50 stock, you must have a stop
loss of 50 cents. That is tight and bound to get hit. Do
yourself a favor and buy 400 shares of this $50 stock and use a
$2.00 stop to start. That is only an $800 dollar loss and gives
you room to trail your stop up to break-even before you are taken
out on a wiggle. Is there ever a time when it is okay to take more
than a 2% portfolio loss on a position? NO! Never means
exactly that. This is a maximum loss by the way. Setting
up your plays for losses of 1% of your equity is even better.
Use
daily charts to get an idea of the 30-day trend, hourly charts to
get an idea of the 1-day trend, and 5-minute charts to establish
your entry points.
If
you are hesitating to take a position, that indicates a lack of
confidence that is not necessary. Just get into the position
and PLACE A STOP. Traders lose money in positions
everyday. Keep them small. The confidence you need is not
in whether or not you are right, the confidence you need is in
knowing you will stick to your stop no matter what. Therefore
you can actually alleviate this hesitancy to pull the trigger by
continually sticking to your stops and reinforcing this behavior.
Averaging
down on a position is like a sinking ship deliberately taking on
more water.
Build
up to a full position as it goes your way.
Adrenaline
is a sign that your ego and your emotions have reached a point where
they are clouding your judgment. Realize this and immediately
tighten your stop considerably to preserve profits or exit your
position.
Look
for opportunities NOT to trade.
You
want to own the stock before it breaks out, then sell it to the
momentum players after it breaks out. If you buy breakouts,
realize that professional traders are handing off their positions to
you in order to test the strength of the trend. They will
typically buy it back below the breakout point which is typically
where you will set your stop when you buy a breakout. (In case
you ever wondered why you get stopped out on a lot of failed
breakouts).
Embracing
your opinion leads to financial ruin. When you find yourself
rationalizing or justifying a decline by saying things like, "They
are just shaking out weak hands here," or "The market
makers are just dropping the bid here," then you are embracing
your opinion. Don't hang onto a loser. You can always get
back in.
Unfortunately,
discipline is typically not learned until you have wiped out a
trading account. Until you have wiped out an account, you
typically think it cannot happen to you. It is precisely that
attitude that makes you hold onto losers and rationalize them all
the way into the ground. If you find yourself saying things
like, "My stock in EXDS is still a good investment," then
it is time to start following the basic principals all professional
traders follow. (That would be protecting your capital,
aggressively cutting your losses, and letting your profits run by
not giving in to the temptation to sell just because you have a
quarter profit).
Siphoning
out your trading profits each month and sticking them in a money
market account is a good practice. This action helps to focus
your attitude that this is a business and not a place to seek
thrills. If you want an adventure, go live in Minnesota for a
winter. If you want excitement, deliberately forget your
anniversary. Just don't trade.
Professional
traders only place a small portion of their assets into 1
position. Or if they take on a large position, then they
strictly limit their risk to 1-2% of their current equity. Amateurs
typically place a large portion of their assets into 1 position, and
they give it "room to move" in case they are actually
right. This type of situation creates emotions that ruin
accounts, while professionals are able to make decisions and cut
losses because they strictly define their risk.
Professional
traders focus on limiting risk and protecting capital. Amateur
traders focus on how much money they can make on each
trade. Professionals always take money away from amateurs.
In
the stock market, heroes get crushed. Averaging down on a
losing position is a "heroic move" that is akin to
Superman taking a spoonful of Kryptonite. The stock market is
not about blind courage. It is about finesse. Don't be a
hero.
Sadly,
traders never learn the importance of "the rules" until
they have blown their account out of the water. Until you "lose
it all" it never seems that important to have to follow the
basics of professional trading. (Cut your losses, let your
profits run, etc).
The
market reinforces bad habits. If early on you held onto a loser
that went against you by 20%, and you were able to get out for
break-even, you are doomed. The market has reinforced a bad
habit. The next time you let a stock go against you by 20%, you
will hang on because you have been taught that you can get out for
break-even if you just be patient and hang on long enough. Tell
that to the folks who bought VERT at $145. When is it going to
get back to break-even? Well, if your timeframe is never, then
you have nothing to worry about. Control your risk by sticking
to your stops.
This
next bit is brutal, but true. The true mark of an amateur
trader who is never going to make it in this business is one who
continually blames everything but his or herself for the outcome of
a bad trade. This includes, but is not limited to, saying
things like:
The
analysts are crooks.
The
market makers were fishing for stops.
I
was on the phone and it collapsed on me.
My
neighbor gave me a bad tip.
The
message boards caused this one to pump and dump.
The
specialists are playing games.
The
mark of a professional, however, sounds like this:
It
is my fault. I traded this position too large for my account
size.
It
is my fault. I didn't stick to my own risk parameters.
It
is my fault. I allowed my emotions to dictate my trades.
It
is my fault. I was not disciplined in my trades.
It
is my fault. I knew there was a risk in holding this trade into
earnings, and I didn't fully comprehend them when I took this trade.
The
obvious difference here is accountability. For amateurs,
everything having to do with the market is "outside their
control." That is not reasonable thinking, and really just
points to an individual who has, probably for the first time, had to
confront their "real self" as opposed to the perfect self
or idealized self they have constructed in their mind. This is
also known as "living in a fog." A person can drift
around through life in their own private world, where they are pretty
special and can do no wrong. Unfortunately, trading rips off
this mask, because you cannot dispute what has happened to your
account. This is also known as "confronting reality." For
many people, when they start trading they are suddenly confronting
reality for the first time in their lives. Just to see the world
as it really is requires a lifetime of training, and for many people
trading the stock market is their first real step in this
journey. Some people say that traders are born, not made. Not
so. If you choose to see the world as it is, then you can start
trading successfully tomorrow.
Amateur
traders always think, "How much money can I make on this
trade!" Professional traders always think, "How much money
can I lose on this trade?" The trader who controls his or
her risk takes money from the trader whose head is in the clouds.
At
some point traders realize that no one can tell you exactly what is
going to happen next in the market, and that you can never know how
much you are going to make on a trade. Thus the only thing left
to do is to determine how much risk you are willing to take in order
to find out if you are right or not. The key to trading success
is to focus on how much money is at risk, not how much you can make.
