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Weekend Newsletter for April 22, 2006 Please forward to a friend! (Subscribe)
The Week At A Glance According To The Charts
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Special EditionA Focus on Trading
Do's and Don'ts
A Focus On Trading Do's and Don'ts -- by Bill Kraft 
Bill Kraft
Editor |
Anyone could become a better trader just by becoming or remaining
aware of some simple but important "do's" and "don'ts." Markets trade
on emotion so if we can learn how to play emotion or group psychology
without being ruled by our own emotions, we increase our chances to
become better traders. Over the past several weeks, I have written a
number of pieces that talk about various factors in trading from money
management to trading trends. Each of these little articles have one
thing in common and that is the attempt to remove emotion from trading.
If we can do that ourselves and, at the same time, develop an awareness
of how the group behaves we have given ourselves a leg up on the crowd.
At the risk of being redundant since I have spoken of many of the
same things in earlier articles, I want to reinforce some of the
principles that I think can lead to better trading.
Some Don'ts
Don't trade more than you can afford to lose. The "bet it all on
red" theory could yield a huge profit, but more than likely over the
long run, it will lead to bankruptcy.
Don't enter a position without a predetermined exit in case the
play turns against you. When someone buys a stock and it drops, the
tendency is to believe that "it'll come back." It may, or it may not.
Remember, though, if a stock drops 50% it has to increase 100% just to
get back to even. The saying is that "the first loss is the best
loss." Why? Because the average trader holds on too long when a play
goes against him. Instead of having a predetermined exit, he waits for
it to come back or waits for it to come part way back until ultimately
he sells in frustration (and that's often near the bottom). Meanwhile,
he is wasting opportunity and time.
Don't exit prematurely if the move is going in your direction.
Just because there is a good profit doesn't mean that the stock can't go
higher. Instead of selling during a good move, consider trailing a stop
loss order, or use a violation of a moving average or a trend line as
an exit.
Don't let emotion rule your trading. Learn how to enter and exit
at points that are determined by preset rules. For example, some
advocate exiting a position when there is a 5% or an 8% loss. If you
have a plan in advance - and follow it - you can help remove the emotion.
Don't be impatient. So often people subscribe to an advisory
service and think it is their way to get rich quick. Truth is, that
isn't usually the way it works. Knowledge of risk, risk to reward,
knowledge of strategies, money management, and following a carefully
devised plan are essentials to getting rich steady, but even then, are
no guarantees. Successful trading and investing requires work and time.
Don't enter a trade unless you fully understand and appreciate
the risks.
Some Do's
Do learn as much as possible about trading and trading
strategies. Knowledge is, indeed, power.
Do have a money management plan in place and follow it. In an
earlier article, I discussed in depth the importance of money management
and some ways to manage trading money. Check that article out if you get
a chance. I think money management is critically important to success.
Have reasonable expectations. Sure, a given trade can yield 35%
or 150% in a month, but that doesn't mean you're going to make that rate
annualized (420% or 1800% a year). Can it be done? Of course it could
be done, but is that a reasonable expectation? Probably not.
Do make your own decisions. No one cares as much about your money
as you do. No one. Apply your own knowledge, gain knowledge, use your
common sense and don't blindly follow others.
Do understand how much is at risk in each trade and compare that
to the potential reward when you make the judgment to enter that
particular trade or not.
Remember that the first exit is generally the best exit when a
trade goes against you.
Listen to those who are profitable traders and don't listen to
"Uncle Louie" who probably hasn't had a profitable trade since 1999.
Treat trading and investment as a business. In the next week or
so, I'll be writing about the business plan and a way to implement a plan.
Good Trading!
Bill Kraft
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