When Do You 'Get Up From the Table'?
Emotions are a trader's worst enemy...
They'll convince you to buy and sell at just the wrong moments... And you'll regret it just about every time.
But if you plan your trades properly, you can avoid this painful trap.
That's why in today's edition of Training Center Saturday, we're sharing a DailyWealth Trader (DWT) issue that we originally published in October 2018. In it, we show you how to apply one of the most important ideas in all of trading...
Plan the trade. And trade the plan.
It's a simple idea. But it's not always easy to put it into practice. You need to know what you're doing... and why you're doing it.
The stock market is in a different place now than it was when we wrote this issue. But these ideas are timeless. They'll help you improve your trading in today's market... and in all market environments.
Read on to learn how you can use this idea and boost your trading results starting today.
Ben Morris and Drew McConnell
When Do You 'Get Up From the Table'?
Some folks trade for entertainment...
With the same mindset that they might sit down at a blackjack or roulette table, they place trades with no expectation of making money.
They just bet and hope.
Sometimes they bet big and sometimes they bet small... mostly based on how they feel. And they "get up from the table" when they either run out of money or feel like it's time.
No goal. No plan. Just action and adrenaline. And more often than not, it leads to losses and letdowns.
That may not describe you 98% of the time. But if it describes you even 2% of the time, that's likely when it will hurt you the most.
As you likely know, the stock market plunged yesterday. The benchmark S&P 500 Index dropped 3.3%. And the tech-heavy Nasdaq Composite Index fell 4.1%. And a lot of individual stocks fell even more.
It was the sort of market action that – if you're not careful – can push you into the "trading for entertainment" category, without you realizing it.
Today, we'll show you how to make sure that doesn't happen... We'll look at one of the most important ideas in trading...
If you don't understand this idea, you are destined for a lifetime of frustration in the markets. But once you learn it, you're on your way to regular profits.
The idea: Plan the trade. And trade the plan.
Here at DailyWealth Trader (DWT), we treat trading as a business...
Our primary goal is to generate consistent profits without taking too much risk. We evaluate and fine-tune our trading plan so we can achieve that goal. And if something isn't working, we don't blame the markets... We blame ourselves and aim to improve.
The first and most important step in doing this is planning our trades...
"Planning your trade" means figuring out your upside potential, defining your exit strategy, and calculating your position size. (You can learn about these ideas in the DWT Training Center report: How Much Money to Risk on Any Trade.)
Sophisticated traders know that a successful trade isn't necessarily one that makes you money. It's a trade in which you have a good plan, and you stick to it... even if it results in a loss.
Some of the world's top traders have win rates of less than 50%. And they don't know in advance which trades will make or lose them money. Their success depends on their process... not on the outcome of individual trades.
If you don't have a trading plan or if you have one and don't stick to it, you have no way to gauge your success or failure as a trader. You're trading for entertainment.
In DWT, we form trading plans using guidelines that are tailored for our trading strategies...
For example, we'll only buy a stock or fund when we have a reward-to-risk ratio of at least 3-to-1. And if we want to use a stop loss of more than 10%, we typically recommend scaling into the position rather than taking a full-sized position from the start.
With options, we only trade stocks that we would be happy to own. And we only place a trade when we can earn at least 2% cash (and 12% annualized) for putting our money at risk.
Over your trading career, you'll form, use, and refine lots of different trading plans.
The second part of today's idea, "trading the plan," is the part that even market professionals struggle with. And it's where the biggest, most frequent mistakes come into play.
Specifically, trading the plan means sticking to your exit strategy. For newer readers, we're talking about using stop losses.
A stop loss is a predetermined point at which you'll sell a trading position if it reaches a certain level... no questions asked. They are designed to limit trading risk and to remove emotions from the trading decision.
There are lots of different ways to choose a stop loss... But two of the most common – which we like to use in DWT – are "trailing stops" and "hard stops."
A trailing stop is calculated as a percentage below a stock's highest recent price. For example, let's say you buy a stock at $10 per share and use a 15% trailing stop. When you enter the trade, your stop price is $8.50 (15% below your purchase price). But if the stock rises to $20, you sell the stock if it falls to $17 (15% below its high while you've held shares).
The beauty of trailing stop losses is that they allow you to stay in during the uptrend... while providing a predetermined plan for exiting positions when the trend turns lower.
A hard stop is chosen before entering a trade and remains fixed. You can use either a specific share price (like $8.82) or a percentage below your purchase price. A hard stop gives your trade a lot of "wiggle room" on the upside... But it's not flexible on the downside. So it's unlikely you'll lose much more than you originally decided was acceptable.
Sticking to stop losses is simple in theory... but difficult in practice.
When the market is falling apart and your portfolio is showing big losses, the natural human instinct is to sell a few positions – at any price – to stop the pain.
We get it. But here are a couple things to consider...
First, the losses usually feel a lot bigger in the moment than they really are. If you use proper asset allocation, even an awful week for stocks shouldn't represent a large drop in your net worth.
For example, if you have 30% of your money in stocks and your portfolio drops 10%, it feels like a catastrophe. But that's only 3% of your net worth. Sure... It's 3% you'd rather not lose. But it won't destroy your retirement or change your quality of life.
It's not a good reason to sell.
Also, when folks make the decision to sell while the market is dropping, they almost always sell the wrong position. They somehow manage to pick the stock that – after they sell it – miraculously rebounds and soars. Their sale marks the exact bottom.
These decisions based on emotions instead of logic are rarely a good idea. They don't follow any rules. They're not part of a plan. And they'll never allow you to improve your trading.
In short, if you "get up from the table" and cash in just because it starts to feel bad, you're trading for entertainment... even if that isn't your intention.
Keep this in mind during tough markets, like the one we're in right now.
Avoiding this common mistake is as simple as following one important idea: Plan the trade. And trade the plan.
– Ben Morris and Drew McConnell
In each edition of "Training Center Saturday," we aim to show you a useful idea that will help you trade and invest in the markets. You'll find much, much more educational material in our Extra Features section. Simply click here to log in to the DWT page, and scroll down.
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