Thursday, July 30, 2015

Get Back To Basics




Last week I offered up some actionable tips to help my readers get back on the path to better trading.  This week I'm going go through 2 specific scenarios that a lot of retail investors struggle with.




Planning a Trade


Everyone knows that they should plan out their trades in advance but time and time again I hear horror stories about naked puts or unreasonable 30% profit targets.  The problem with trade planning is that it can't be done in a vacuum - you've got to take everything into account and think through all of the potential outcomes.  

The easiest way to form the habit is to force yourself to create a trade plan for every stock on your watch list.  Another benefit with this approach is that it encourages you to slim down your watch list to only the best possible candidates.  You can also increase your chance for success success by planning for all three potential outcomes - profit, loss, AND time.

Every trade plan needs to include:

  • Specific entry conditions - I like to use a range for my buy point
  • An exit condition for profit, for loss, and for timing - I usually give trades 35-40 sessions to avoid the impact of earnings reports
  • Relevant market info - I always include market conditions, document the leading sector, and include a hyperlink right to the most recent chart action


I know that sounds like a lot of work, and it is.  I offer a Watch List & Trade Plan service for people that just don't have the cycles to sit down and hammer through this every weekend.


Knowing When To Exit



The other big problem that plagues retail investors is knowing when ti exit a position.  Most retail traders that I know either exit early because of fear, exit late because of greed, or refuse to exit at all because of hope.

This is a problem that can easily be fixed with just a bit of discipline.  If you recognize that you struggle with exiting, then you need to commit to exiting at least 1 position every month.  You don't want to exit arbitrarily, however, so make sure that you're getting out because:

  • You hit your profit target from your trade plan
  • You were stopped out according to your trade plan
  • You hit the session limit from your trade plan

One thing to note, it's perfectly OK to re-enter a position that you've exited but only if:
  1. It survives your watch list funnel
  2. You've created a fresh trade plan for it!
A little discipline will take you a long way with exits so make sure that you stick to your guns.

What's Next?


In August I'm going to explore how your instincts can get in the way when you're a retail investor.  We'll look at how you can use greed, fear, and hope, to your advantage!  I'll also show you some interesting ways to balance your behavior with the math on every trade.

Happy Trading!


DISCLAIMER



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A LICENSED PROFESSIONAL. You understand that you are using this Information AT YOUR OWN RISK.