I’ve said it once, and I’ll say it again – this week was a harsh reminder of what the market is capable of.
When I see wild volatility like this, I start thinking about my core principles when it comes to trading like…
- Only look at trades with proven historical patterns.
- Stick to the set limit price.
- Plan your trade and trade your plan.
And that’s just naming a few.
But when the market gets hit with volatility like we’ve seen recently – there’s something else that’s important to remember…what you shouldn’t do when trading.
So, that’s what we’re going to talk about today.
Here’s my big three…
- Trading Without Rhyme or Reason
Too many people jump into the stock market as a way to “get rich quick.” Now I’m all for getting rich quickly, but you just can’t do it without some sort of plan. And the best one to use (and my personal favorite) is rules-based trading. This is basically planning your trade and trading your plan, no matter what the headlines are saying or the markets are doing. You’re not trading on emotion (which is the fastest way to lose all of your money). You’re not just guessing and hoping for your trades to work out – you’ve got a clear set of rules. That method isn’t something you can quantify or back test. It’s really not a method at all.
Think about it…
You’d never buy a house or a car without knowing exactly what you want, how much you’re willing to pay, and when you want to pay it off. So why would you ever put your hard-earned money into the markets without knowing exactly what you want, how much you’re willing to pay, and when you want your profits.
- Buying and Selling Stocks… As Your Short-Term Profit Strategy
Now don’t get me wrong, I’m not against stock investing at all – as a long-term strategy. Buying and holding stock for the long term means you’re willing to sit through the bullish and bearish cycles for those big returns down the line. It also means you’re primarily focused on a company’s revenue and earnings (fundamental analysis) instead of patterns and market data such as price and volume (technical analysis).
Earnings and revenue can be tricky, though, and can take years to work out for your portfolio. Take Amazon.com, Inc. (AMZN)… anyone who bought the stock during its initial public offering (IPO) has turned a $1,000 investment into a $638,000 today – 20 years later. Remember, though, the stock also dropped nearly 90% in 2000, which caused a lot of investors to sell their shares.
But there’s a much better way… and it’s called options.
With options, you basically “rent stocks” for much less than you would to buy them outright. And instead of paying up to thousands of dollars for a single share, you get to control 100 shares at a time for much less. Options also reduce your risk, giving you leverage in the markets, and deliver profits much, much faster. You’re talking about days, weeks, or months to make money – not two decades. Furthermore, it doesn’t matter if the markets make record highs, record lows, or don’t move at all… there’s a safe and easy way to profit no matter what.
So why would you ever waste thousands of dollars buying single shares of stock to hold in the short term (with little chance of recouping that money) … when you can double or triple your money for a quarter of what you’d pay to buy the stock outright?
- “Betting the Farm”
You can think of these “all-or-none” investors like the guys who spend all day and night in casinos. They start out with the smaller bets at first but then believe they’ve found the secret and put all their chips on the table for that one big win. But 10 seconds later, they’re sulking away from the table with their tails between their legs because they just lost everything they had.
Investors do this, too.
They suffer a few small losses and then feel as though the markets “owe them” for those losses. So they put all of their money on that one trade they think will give it all back to them. This is called trading on emotion and without a plan (which we talked about earlier). And unless it’s your lucky day, you’re looking at losing all of your money – on one single trade.
So don’t bet the farm on one trade. Instead, consider risking no more than between 2% and 5% of your account per trade.
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To your continued success…
Tom Gentile
America’s #1 Pattern Trader
