Stacey looked at the chart and took a long breath. She had placed a buy order with her broker on AAPL. This was after the price had hit a new high for the month and confirmed a long term trend according to her advisor. That was several weeks ago and so far it was moving well. She was up 8% and felt good about what was happening. This was February, 2007 and Stacey believed that this trend was going to continue and continue. Then it happened, the price fell precipitously across the broad markets. Stacey lost a major share of her portfolio due in part to the fact that she did not have stops in place since she was in a “buy-and-hold” strategy.
Jack was in a buy-and-hold strategy for much of the past decade and had put his money in 401(k) plans and a brokerage account. Unfortunately, he stood by and watched his portfolio take a huge hit of about 45% in one year. “This is unacceptable,” he had told himself and changed his approach completely. The ups and downs of the market are quite volatile and can put you in a precarious position with regard to your positions over time. What buy-and-hold amounts to is a buy-and-hope strategy where the investor/trader feels helpless in the wake of an incoherent approach to identifying market turns. There is an ongoing debate about the merits of buy-and-hold vs. trading your own account. More and more investors and traders want to take the reins and not leave their market decisions up to money managers.
If you are going to manage your trading accounts it is important to do so with strategies that support you in identifying high probability opportunities. Additionally, it is critical that you have a set of rules regarding your planning, preparation, information processing, analysis, and execution. Your hard earned money is too valuable to leave this process in a fuzzy and amorphous process. Now, it’s not as though a buy-and-hope strategy can’t work at all. Over the past 5 years we have watched the markets continue to rise and if you had employed this position you would likely be ahead; however, the important point to remember is that the markets do not trend forever and they incur substantial corrections which can totally wipe out years of gains with this approach. Not to mention the fact that many investors have gotten tired of paying advisers so they fire their brokers and stop paying annual fees that could exceed 1.5% to them for essentially picking financial instruments that the investor/trader could pick themselves
If you are going to take control of your trading, then what should be your compass? You’ve got to get market knowledge to make prudent decisions about which stocks or financial instruments to play and intelligently track market timing. In addition to market knowledge it is crucial to have a plan that lays out your purpose, goals and vision along with the asset classes, types of trades, time frames and analysis guidelines. Trading should be treated like a business and part-time trading like a part-time business that requires a plan. This is your map to get you from where you currently are financially to where you want to be. The next essential is to have a set of rules that governs your trading process. Not having rules will cause you to lose most if not all of your money. Trading is a “rule-based” endeavor and there is no getting around it. Also, you must have a money management strategy that will inform you on position sizing and reward to risk ratios that will support your profitability even if you take on a majority of small losses. With a 3:1 reward to risk ratio you could lose as much as 66% of your trades and still be profitable. Losses are a part of trading so it’s critical to ensure that your losses are kept small by placing mechanical stops in each and every trade. Of course, you must maintain those stops and that can be extremely difficult for the beginning trader. So, next on the list of essentials if you are trading your own account is to have self-discipline. Without self-discipline, or the ability to plan your trades, trade your plans, follow all of your rules and keep all of your commitments then none of the other items just mentioned will matter. All of these items are supported by keeping a journal and documenting your trade process along with your thought and emotional content. Self-discipline is also greatly helped by bringing into awareness the issues that you experience as you attempt to plan, follow rules and keep commitments. Then you can improve on them.
There has been an explosion over the past decade of investors trading their own accounts online and the landscape is replete with schools that aim to teach you how to make those decisions. But, of course you want a trading academy that not only has unwavering integrity but has a stellar track record of providing guidance and instruction that overwhelmingly students rave about.
Trading is arguably the single most challenging venture on the planet due to the emotions of fear and greed that impact upon the decisions and choices that you make. To get desired results you must jettison and let go of the hope by instituting strategies that work and maintaining a focus on what-matters-most in the trade. This is what Online Trading Academy teaches as it guides traders from confused and undisciplined novices to well-grounded, knowledgeable and disciplined participants in the markets. Ask your Online Trading Academy representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”
Dr. Woody Johnson