Do This, Don’t Do That

Rick Wright

Hello traders! As I sit here in beautiful Atlanta, Georgia, teaching a great group of students about my favorite market, my thoughts turn to the lonely traders sitting at home with little or no support system or rules. The view from my hotel room is a few treetops, and the silence right now is deafening. Reminds me of my days trading at home, before I started teaching with Online Trading Academy. The week or so a month that they get me out of the house has truly been a blessing!  These new traders, after trading alone for a few hours, days, weeks, etc., often turn to the internet for input about their decisions and plans.

While the internet is obviously a great tool, like any tool it must be used properly to get the full benefits. Many people who start trading have seen a banner ad or two, or saw a few people on some business TV station and thought that trading seemed like a great way to make a lot of money very quickly. “Just look at that guy on TV, his suit looks really expensive and that watch must have cost a fortune! He says he is a trader, I want to trade too!” Reading many of the amazing stories on the web about traders turning $5,000 into $100,000 in a few short weeks or months causes people’s heads to spin! For some reason, some people think they can earn a six figure income trading by simply reading books and plugging in their computer, no education required. If there is a job that will pay me tens or hundreds of thousands of dollars for a weekend worth of reading, please let me know what it is! Would you try to be a lawyer after reading one law book? How about a doctor and one medical journal? A race car driver after reading some website? You can’t even be a good bartender after reading a book about mixing drinks! (No offense meant to bartenders, I was one once!) Why do so many people think that trading is any different from any other learned skill? Don’t know why, but I’m glad that many people every week come into the market not knowing what they should be doing…

So you’ve decided to read five books, and look at ten websites to prepare yourself for trading. Hmmm, where to start…Just for fun I put the term “trading plan” into a popular search engine and guess how many hits that search received? 1,120,000. That is not a typo. One million, one hundred twenty thousand results. Perhaps the internet is too good of a tool for searching!

Let me give you a few basic pointers. First of all, you need a trading plan. Inside of this trading plan will include a few things:

  • Risk management rules (if you have less than five you are doing it wrong)
  • Trading setups that you will look for (at least two)
  • Trading style(s) that you will use
  • Long term goals (hugely important, to be discussed more in depth below)
  • Trade review procedure

There are several other items that belong in your plan, but this is a good start. The “Do This” part of this week’s newsletter title is politely asking you to build a trading plan. If you don’t have one, you will probably fail as a trader. Sorry, that’s how it works.

The “Don’t Do That” part of the title refers to your long term plans-or lack thereof. I strongly recommend having long-term goals in your plan. Everyone will be a bit different, but some plans I’ve heard of include: send my kids to school, quit my job, manage other people’s money, buy a new car or house, etc. Having long-term goals is another way to hold yourself accountable – much like my last article.

Inside of your risk management section of your trading plan will be certain percentages of your account that you will risk on a per-trade basis, per-day, etc. By limiting yourself to small risk like 1% of your account per trade, you should be able to withstand several losing trades in a row without destroying your account. In my seven years of teaching with OTA and 16 years of trading, I have heard too many horror stories of people over-leveraging and trading too big of a position size for their account and experience level. How many traders do you know that have blown up an account or two because they traded too big of position size? I would say many of you have probably done it, because I know I have!

When you are considering breaking your rules, and risking too much of your account on one trade just because “it looks like a really good one,” I want you to remember the second portion of the title. “Don’t Do That.” Why on earth would you risk an important long term goal like your child’s education by over-leveraging?? Don’t Do That! How many foolish over-leveraged trades does it take to wipe out your trading account, or even to wipe out a few weeks’ worth of good trades? It only takes one foolish trade to set you back months or even years! Don’t Do That! Knowing what the potential is for disciplined, experienced, profitable traders is amazing. Always planning for the long-term will help keep you from doing something silly in the short-term. Sing it with me, Do This, Don’t Do That!

Until next time with my hair tucked up under my hat,

Rick Wright

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.