Today I will cover the 2nd M of trading, the management of a stock after purchase of which the consequences determine 30% make up of a successful trader kaizen trading plan. Choosing a method of selecting stocks to buy, i.e. the 1st M constitutes 10% as well as having a positive kaizen or continuous improving mindset (60%), the 3rd M were already covered in earlier articles.
The secret of a successful trader is that he trades without fear and his trades are fully automatic in that he follows a set of rules to select stock and another set of rules after he buys the stock. In other words he has encompasses both before and after purchase i.e. total cycle of the trade.
Here stock management is creating your own stop-loss and trailing-loss rules that keep your risk within comfortable limits and prevents emotions of fear and greed. These rules must be made before you trade to avoid the agony of indecision and paralysis such that small losses (leaks) turned into huge a colossal disaster (torrents) that downgrades your life into the drains, forever. Once you set your rules and limits, you know with certainty and no fear you can suffer a serious of losses before you can be bankrupt, hopefully before then you get a sense to get out or better still learnt the ropes to arise from the ashes to become a profitable trader.
A successful trader always has the stop-loss and trailing-loss written onto stones. It is imperative that the rules are drawn up before any purchase. A stop loss is a biggest loss you can tolerate and a trailing loss is the minimum profit you want to make.
Simple rules for minimising losses can be
a) Maximum dollar loss, say $300, winnings say $1000
b) Percentage of trade in loss, say 10%,
c) Retracement of purchase price levels ratios of 0.618, 0.31
d) Multiple of daily volatility range, say 3X
e) Support level whereby the prices stop falling
Alternatively when the stocks are moving in the profitable direction, you should maximise your winnings and never allow a profit to turn into a loss by setting up your trailing-stop rules, usually
a) Minimum dollar profit, say $1000
b) Percentage of trade in winning, say 30%
c) Ratio of purchase price 1.30, 1.50
d) Multiple of daily volatility range, say 5X
e) Resistance level whereby the price hits a ceiling
Note these rules also ensure you only purchase stocks after you have ascertained a good reward/risk ratio. Typically it should be a minimum 2.5, that is, your dollar profit must exceed your probable dollar loss by a ratio of 2.5, for example a possible gain of $750 against a loss of $300 when you trade.
The mark of a successful trader is always in minimising losses and maximising profits and when doing a review of past traders, he learns to finetune his method of selecting stocks, dollar loss during losing trade, dollar gain during winning trades and finally changing his rules along the way. And how he does that is what distinguishes him from losers.
Many a trader is blown out of the market because he sets the rules but he cannot follow. Remember a big loss once began as a small loss and procrastination in cutting the loss (i.e. not following a stop-loss) is always, always the reason.
Many a secret is never new, it is always borrowed and given a new name and I cannot end this article by thanking Van Tharp, author of “Trade Your Way to Financial Freedom”. Thru his researches, he covers the search for the Holy Grail of trading, finding a trading system that works just for you and the proper selection of a time frame and market to trade. For more info <click here>