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Sticking to Rules Can Improve Your Trading
By Jobo Smith
One of the most fundamental aspects of trading AND investing, is sticking to a fixed rule set for how you want to enter and exit a trade. The basics remain the same whether you plan to hold a stock for 5 minutes or 5 years. You have to establish the rules BEFORE you purchase the stock. A lot of people only try to figure this out in hindsight - without a plan you are dead in the water and your money will be taken by those people who do have a plan and are following it, or who are using a stock trading system. By plan I don't mean a get rich quick plan, or a foolproof way to make millions. I am talking about a rule for getting into a stock, and more importantly, a rule for exiting a stock based on conditions that might happen. The entry is never as important as the exit, after all, you make nothing (or lose nothing) UNTIL you sell the stock. You should always have 4 plans of action: 1. Identify a stock, and figure out an appropriate entry based on expected holding time and stock price characteristics.
2. Before you even get filled, have an approximate hold time in mind, and reasonably what you think the stock should do.
3. Figure out a price target exit (based in reality, not greed). Once you have this target, figure out a trailing stop price once the trade starts working where you will cut the trade off. After a minimum move (depends on hold time), this stop price should move to at least break even.
4. Figure out where the ultimate cutoff is if the trade does not work at all. Meaning you are dead wrong. This happens even to the smartest and brightest traders. This cutoff should trail the price up if you are marginally right (meaning it starts off ok, but then falls apart over time). This way you are using some of the house (market gain) money to move up your stop. The main key here is actually following through with the plan - for better or worse. Too many times novice (and even advanced) investors get into a bad habit of ignoring stops because they saw a few times where they cut the trade off only to watch it run higher and they would have had a nice gain. This is doom incarnate. Do not fall into this trap - by nature everyone ignores the stops where you exited at 30 for a 2.00 per share loss and it went down to 20. You only remember the 30 stop that turned up and ran to 38. Also another KEY point is : you can always, always, re-enter a trade that you stopped out on if you think it was a mistake or the circumstances have changed. Just remember, you need a plan again, just like before AND you have to stick to it. A general rule of thumb is no more than 2 tries on any name - meaning if you try 2 times and get stopped for a loss both times - leave that name alone for a bit EVEN if you think you need to get back in. After all, there are thousands of stocks out there, don't let emotions get the best of you and make you think you have to make the loss back in that stock. Who cares what the stock is as long as you make money? |
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May, 2012
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