Increase Your Trading Profits Using Better Trades
Windowofworld.com – Do You Want Bigger Trading Profits? Then Go After Less Losses! Hello, this is Bob Eldridge and I would like to share with you an often-missed source of profits from your trading. This is a simple concept but very important if you hope to continue trading for a long time! The concept is to control the amount of loss you have and the dollar amount of that loss.
I realize the statement sounds so obvious that you might be tempted to ditch this article for the sake of a bad television show, but please stick with me here. I’m going to share with you a few things you might not expect to find here!
To better visualize the concepts I’m describing, imagine a large sink, the kind you may remember from your childhood. Now imagine how difficult it would be to fill a sink if there were several ‘six inch’ holes in the bottom! No matter HOW MUCH of garden hose you fill, the water flows faster than it gets in !! Now imagine plugging in each hole, one at a time. Install the first one and the difference is almost imperceptible.
Install the second hole and you start to see that less water is splashing onto the ground. Install the third one and you will probably see the water level in the tub starting to rise… maybe just a little, but it’s still rising! Install ALL the holes except for one and the difference is measurable! Now that you are in the one hole, let’s start fixing them one by one. First we close HALF the hole… while the tub is still leaking, you can now tell that there is more water going into the tub than it is flowing out of the bottom. Fill in the remaining half of the leak and you start to adapt to the idea that it’s okay for a little water to come out, as long as there’s more coming in than out!
Our trading account is like that. Most new traders have a HUGE trading account “hole” and their money is draining faster than they can replace! No matter how profitable they are on some of their trades, they seem to return all of them! If we are smart about our trading when we become aware of it, we will STOP trading until we encounter a challenge and IMPROVE! What I’m describing is an IMMEDIATE result of FOCUSING on profits and forgetting almost completely about controlling losses.
There are many reasons for that but despite the reasons, the results are the same. Left unchecked, such a situation would have us completely out of the trading business in no time! Does this describe you and your trading account? Do you want to know how to ‘FIX’? Let me share with you four trading RULES that directly tackle losses and if followed, can ‘patch’ many of your leaks in profits!
RULES 1. Wait for a stock to CONFIRM its anticipated direction before entering a trade
This rule can reduce the AMOUNT of losses you incur. As simple as it sounds, it’s one of the most frequently violated principles of good trading habits. Often these rules are broken so that we are all used to cute little descriptions such as “catching a falling piano,” or “grabbing a fallen knife.” What you use for this confirmation is your own business; price increases or decreases, momentum, trading frequency, or bid / ask “measures” are just a few of the ways.
Personally I put everything together (more or less), developing a ‘feel’ about confirmation, rather than a quantifiable quantity. However you choose to set a confirmation, let experience be your best guru here and DO NOT enter the trade until you are sure the stock is moving your way!
RULE 2. As you fill in entries, place STOP losses to minimize your potential losses.
This rule controls the AMOUNT that you can lose on a single trade. I like to use about 1/2 of the stock’s daily movement for my stop loss amount. For example, if the stock price moves on an average, say $ 1 each trading day, then I will withdraw 1/2 of that, or 50 cents and place my stop loss there, limiting the losses that may occur on that trade. Whatever you use, SETIA adheres to the protection provided by stop. In other words, DO NOT CHANGE IT. If you are stopped, you are stopped. He who trades and runs away from life to trade another day!
So much for minimizing NUMBER and dollar amount losses. Equally important is allowing your profits to maximize AT THE SAME TIME! Here’s how to do it.
RULE 3. When you become profitable in a trade, replace the stop loss with a TRAILING stop, followed by the amount of that profit.
This one is so important that I believe it should be the 22nd amendment to our Constitution! Let’s say you are up 25 cents in a trade and you have a stop loss at 50 cents below your entry (on a long position). Change the stop loss with a trailing stop of 25 cents. At THIS point your WORST CASE result to trade is BREAKEVEN (give or take a few cents) !!! In my live trading lab on my website I often refer to it as a MAGIC point in trading. You have almost NOTHING to lose and EVERYTHING to gain from then on!
Lastly, for the ‘do-it-yourself- trader …
RULE 4. Leave the trade alone from now on!
The market as a whole will do a much better job of managing trades (following the rules above) than you or I could EVER! Once you reach the MAGIC POINT in your trade, just go and do something else. Your trades are done on autopilot!
I’m excited to be spending the last few minutes sharing this with you. I hope this helps you to trade more profitably !!