Humble1 advice Part 3

Posted on July 19, 2005
Tags: General rant |

Part 3

I hold stocks as long as the pattern plays out. If you are giving money back after getting ahead, then you must be changing your rules after you get that little cushion going. I treat all my trades like a light switch. There is a trigger to get into it, then there is a stop loss to protect my capital, then there is a pattern target, or price target based on support or resistance. All this is written down and put right on the chart before I enter the trade, and I snap a picture of it and update it as the trade progresses until it is closed. There is no other criteria that can be considered. The trade is either on or off according to those 3 criteria. The key is to develope this trading plan completely each time before you enter the trade and become emotionally attached to the situation. I try not to think in terms of making money, but always think in terms of what I have to do to take a postion without risking much for the reward that is there. The market either giveth or taketh away after that. If I have a 3 to 1 ratio, and I am using fixed dollar amounts to take positions, then I can go 3 losing trades in a row before I need one to break even. Most traders have at least a 50/50 win loss ratio starting out. So if I just stick to my rules, and if my winners/losers stay at 50% or above, I make money automatically while keeping my risk to a minimum. I divide my postfolio up into equall units. For example if I have $100k total account, then I use not more than $10k for any one postion. I risk no more than 2% stop loss of my total $100k on any one trade ever. Most of the time it is much less. The pros use these ratios in their trading and if they exceed them, they get put on probation or get fired. You can divide you account in bigger chunks, but you can never exceed that 2% rule and survive. [ood thing it is a slow day today] ;-) If my win loss drops below 50% for any length of time, I stop trading and try to figure out what I am doing wrong. This will happen near General market tops and bottoms, and is to be expected. Right now a lot of setups are not following through on most days, so I cut way back. On August 13, 2004, the last well defined general market bottom, I was able to pick winners almost everyday for weeks on end. This is very typical, but most newer traders don’t recognize they are simply in sync with the market and they get the “I’m brillliant” mentality. We all do that. After time goes by you will see this pattern over and over. Sometimes you pick winner after winner, then it stops. Soon you recognize the market has given all it will give this cycle and you wait for things to clear up. We are at one of those times right now. The market is not clear, bearish divergences are showing up [these are early warning signals and can go n for some time] and the market needs time to consolidate after moving almost straight up since August. It will either form a continuation pattern [or base] for further upside, or a reversal pattern. Right now it is too soon to tell as none has triggered. Hope this helps. humble