To Trade or Not to Trade: The Most Important Question

In trading activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing, is to do nothing.

In your actual trading you have to do four things very well to make money.

You have to know when to get in.

Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average. Short down trending junk stocks. Go where the trends are.

You have to know when to get out.

When your trade reverses through a key support get out. When the market trend changes get out of your long positions. When your stop loss is hit, get out. When the stock reverses and hits your trailing stop, get out.

You have to know when to stay in.

If you enter a stock with the potential to trend let it run as far as it will go. Do not set a target, just trail your winner with a stop. Let the stock tell you when it is done running. Do not cut your winners short. 

And most importantly you have to know when to stay out.

If you do not know what to do, do nothing. If the charts confuse you, stay out. If the volatility is escalating and you are losing in every trade, stay out. If you are a trend trader and you see no potential trends, stay out. If you want to go long but all the stocks you want are going down, stay out.

Ten Things that the Markets Reward

The free markets do not give up profits easily. The vast majority of all traders lose money over the long term. Many studies say it is as much as 90% that are net losers after all their trading. Even investors can work very hard to end up at even after a brutal bear markets takes back all their gains that sometimes took years to accumulate. I have been fortunate to be in the minority by both making and holding nice six figure wins over the years. What helped me do this? What does the market reward?

The markets reward what is most difficult to do.

Here is what is rewarded OVER THE LONG TERM. (Not every time but the odds are in your favor).

1. Buying at breakouts. (It is not too high, it just overcame all the selling pressure, the odds are that it keeps going in the direction of the break out.)
2. Shorting falling knives. (Fear has gripped the shareholders, what are the odds it falls farther? Very good.)
3. Risking small amounts of capital in each trade. (The odds are you will never go broke, so you will be around long enough to win.)
4. Doing your homework. (Fortune favors the prepared mind.)
5. Cutting losses short. (If you keep your losses small you will not have any huge losses.)
6. Letting winners run. (A few huge wins a year is all you need to make money.)
7. Trading the market action not your opinions or predictions. (When you trade the chart action the odds are in your favor.)
8. Going primarily long in a bull market. (This puts the odds on your side.)
9. Going primarily short in a bear market. (Ditto)
10. Trading a proven plan not a hopeful whim. (Winning traders are running a business, losing traders are playing in a casino.)

The markets reward the same things that businesses do, discipline, focus, following trends, leadership, risk management, planning, and putting the odds on your side.

Be a business person not a gambler in your trading.

Trading: The Key to Everything

What trips up the vast majorities of traders so they never quite make the transition from new trader to good trader?

• Not being able to deal with the stress of trading: this is caused primarily from a lack of faith in themselves and or their method.
• They lack the ability to pull the trigger when it is time to enter a trade or cut a loss.
• Some people just can’t overcome the fear of losing money both in the entry and exit.
• Many traders just do not have the discipline or work ethic to create a trading plan through proper homework.

Most traders have no trouble over analyzing the markets to death with enough indicators to make someone go cross-eyed. Many traders read enough books to know how to trade, many follow enough different people online that they get so confused they do not know what to do. Most traders spend far to much time in front of the computer all day watching the prices tick. The majority of traders would really quit trading if they added up the amount of time they spent for the privilege of losing money.

What is the key to over coming the barriers to success in trading. A GOOD TRADING PLAN, not a few rules I mean a complete plan. A plan that you 100% believe in based on your own studies and back testing. Your own personal plan that YOU created, not someone’s opinions.

What needs to be in there?

The Trading Plan comes first and should account for the following parameters:

1.  Entering a trade. Quantified approved entries.

2.  Exiting a trade. Predetermined Exit point BEFORE you enter a trade.

3.  Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.

4.  Money Management. How much capital will you risk on any one trade? This is the key to position sizing.

5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?

6.  What to Trade. What qualifies stocks to be on your watch list?

7.  Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?

8.  Back Testing. You need back testing either with a computer, by reviewing charts, or others research to show that your system is a winner.

9.  Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.

10.  Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.

This is a very basic outline, I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will win in trading the only question that remains is when?