INTRODUCTION
Having been buying and selling stocks and options within the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight…
And
I have seen millionaires become paupers overnight…
1 story told to me by my mentor is still etched in my mind:
“Once, there were two Wall Street commodity market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their share market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to acquire both their opinions. His friends were naturally excited about what the two masters had to say about the commodity market’s direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He mentioned, ‘One stated BULLISH and the other mentioned BEARISH!’”
The point of this illustration is that it was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and within the mental attitude and discipline a single uses in implementing that strategy.
I share here the basic share and choice buying and selling principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them simply because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your share and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options buying and selling method that you are following is too complex even for easy understanding, it’s probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. Inside the heat of a trade, it can be easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of the commodity or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as several critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is probably the most important principle.
Most stock and options traders do the opposite…
They hold on to their losses way too extended and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the cost go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past share and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can’t wait to jump right into the share and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on “the next big trade” than they may be afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take commodity and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your share and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your personal money management rules and put in everything you have? Do you remember what usually happens after that? It isn’t pretty, is it?
Regardless of how confident you may be when entering a trade, the share and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
Inside the very exact same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don’t you?
What, then, is the difference? The difference is within the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable buying and selling up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next commodity or options trade?
Overconfidence as well as the false sense of invincibility determined by past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the very first trade you have ever made in your life. Never deviate from your commodity or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful share or options strategy only to fail badly?
You are the one who determines regardless of whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, “The investor could be the asset or the liability, not the purchase.”
Understanding yourself initial will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether or not the entry, management, and exit met every criteria within the strategy and whether or not you have followed it precisely before changing anything.
In conclusion…
I hope these basic guidelines that have led my ship out with the harshest of seas and into the greatest harvests of my life will guide you too. Good Luck.
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