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Improve Your Trading Revenue As Well As Minimize Your Losses
Would You Like Increased Profits? Then Go After Decreased Losses!
Let me share four RULES for trading which directly address losses and if followed, can 'plug' many of your profit leaks!
RULE 1. Wait for that stock to CONFIRM the anticipated direction prior to entering the trade.
This rule can decrease the NUMBER of losses you have. As simple as that sounds, it's one of the most often violated principles of good trading habits. So often is this rule broken that many of us are all familiar with cute little descriptions such as "catching a falling piano", or perhaps "reaching for a falling knife."
What you use for this confirmation is your own decision; price rise or fall, momentum, frequency of trades or bid / ask "size" are just a few ways. Personally I combine them all (more or less), developing a 'feeling' for the confirmation, rather than a measurable quantity.
Nevertheless you choose to define confirmation, let experience be your greatest teacher here. Do not enter the trade until you're convinced the stock is moving your direction!
RULE 2. When you are filled on the entry, place a STOP loss to minimize your possibility of loss.
This rule controls the Amount you may lose on any one trade. I like to use about half of the stocks daily movement for my stop loss amount. For example, if a stock price moves on average, say $1 every trading day, then I'll back off 1/2 of that, or fifty cents and place my stop loss there. This restricts the losses possibly incurred on that trade.
Whatever you decide to use, be FAITHFUL in adhering to the protection afforded by the stop. In other words, Don't CHANGE IT. If you're stopped, you're stopped. He who trades and then runs away lives to trade another day!
Equally necessary is allowing your profits to increase AT THE Same TIME! Here's how to do that.
RULE 3. When you become profitable in a trade, replace the stop loss with a TRAILING stop, trailing by that total amount of profit.
This one is so important that I think it should be the twenty second amendment to our Constitution! Say you're up 25 cents in a trade and you have your stop loss in at 50 cents below your entry.
Replace the stop loss with a twenty five cent trailing stop. At this point, you WORST CASE result for the trade is BREAK EVEN (give or take a couple of pennies)!!! On my live trading lab on my website, I often refer to this as the MAGIC point in the trade. You have virtually NOTHING to lose and EVERYTHING to gain in the future !
Finally, for the 'do-it-yourself- investors:
RULE 4. Leave the trade alone from this point on!
If you're in doubt, seek the advice of any investment professional on how to effectively raise capital. All you have to do is search: public shell or reverse merger.
The market overall will do a far greater job of managing the trade than you or I EVER could! Once you have reached the MAGIC POINT in your trade, just go away and go do something else. Your trade is on autopilot!
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