"Fundamentals, while important, DO NOT help the investor or trader assess risk and timing issues in the HERE and NOW."
Sound methods follow the investor or trader who has a sound mind.
I repeat!
Sound methods follow the investor or trader who has a sound mind.
In other words:
Proper investing or trading is a by product of PROPER THINKING.
I have read over a hundred books on investing and many more magazines and articles than that. I have found that there are many strategies out there for selecting a stock and triggering a buy signal.
Momentum investing, trend following, turtle traders, Pristine methods, reversals, snap backs, the anti, the holy grail, momentum pinball, gap reversals, range contraction and many, many more coming from Investors Business Daily, the Market Wizards and an endless number of other individuals. All of them have a strategy that gets them into the market.
In spite of the many different strategies for buying stocks, they all have the same strategy for managing losses. Every one of them say you should hold your losses to a minimum.
THINK ABOUT THAT!
Every single successful investor or trader, using many different strategies for entering a position use the same strategy for limiting losses. And, not a single person recommends averaging down on stock that has turned against you. NOT A SINGLE ONE!
I know there are some out there that can point to a trade or two where it bailed you out of making a mistake but, if the strategy were successful, you'd be one of the mere 5% of people who outperform the market on a consistent basis.
If you want to win big, you must lose small.
The difference between those who are most successful, and those who aren't, is in the way they handle their losses. It's not a matter of how well they win, but how well they lose. If you learn to manage your losses, the wins will take care of themselves.
As a young Marine, I was taught how to manage men in combat. There was a time to attack, a time to withdraw and a time to protect the ground we earned.
Investing and trading are like that. There are 3 steps that should be taken in every trade as we try to achieve our objective.
1. The attack stage.
2. The withdrawal stage.
3. The protective stage.
With this in mind, there are 3 components to every trade. One entry and two exits. One exit below your entry price and one exit at your price objective.
Once you have determined your entry (what I call the attack stage), it's important to know when your battle plan isn't going the way as planned. Assuming that your dollars are soldiers, how many lives would you be willing to risk to prove your battle plan wasn't working?
When your battle plan isn't working, it's important to withdraw your troops and regroup, so you can fight another day.
You must know in advance, at what point the trade isn't working, and cut your losses so you can fight another day.
If the battle plan isn't going according to plan, there comes a time when you must protect the ground you've gained. You don't want to sacrifice lives and then lose the ground they fought so bravely to obtain. You set up perimeters that you can defend.
In the world of investing, we must set up perimeters to defend as well. As your trade turns profitable, you must protect the gains that are in place.
THE MARKET DOESN'T GIVE GAINS, THEY MUST BE TAKEN. It doesn't do any good to find an excellent prospect and have a nice gain and then give that gain back in a correction. Profits don't count unless you take them.
Trailing stops and moving averages are some of the tools we can use to set up our protective perimeters.
Let's use OIH as an example.
Towards the end of August, OIH jumped above the 20 day moving average and above the momentum bands. For the next 5-6 weeks, OIH climbed the upper range of the momentum bands, establishing a strong uptrend. As you gained this ground, you must know in advance what you desire to protect and where you decide to withdraw if the battle starts to turn against you.
stockcharts.com[h,a]daclyiay[d20040611,20041006][pd10,1!b20][vc60][iut]&pref=G
I have mentioned several times that when you have a strong uptrend as shown in OIH, a close below the lower band is a change in trend. This is where one should take some profits of the table. This is the protective stage.
One week later, the price not only dropped below the lower momentum band, it closed below the 20 day moving average as well. This is where one should have realized the trend had changed. This is where profits should have been protected and monies withdrawn from the trade, to fight another day.
stockcharts.com[h,a]daclyiay[d20040611,20041012][pd10,1!b20][vc60][iut]&pref=G
Lower prices were in the making.
stockcharts.com[h,a]daclyiay[d20040611,20041109][pd10,1!b20][vc60][iut]&pref=G
And to show that this analysis isn't in hindsight, on October 13th, the day after the above chart gave the withdraw signal, I posted a message in the Boom Boom Room telling folks that the correction was for real.
>>> This correction is for real. It will take a lot of good news which isn't already known, to get the price back up to recent highs in the short term. <<<
dev.siliconinvestor.com
There are 3 components to every trade. One entry and two exits. These components should be in place when the trade is made so you don't get caught by surprise. And, there are 3 actions required if we are to be consistently profitable. The actions we must master are the attack stage, the protective stage and the withdrawal.
Manage your dollars like you would manage real people. Your leadership skills are at stake. Work smart. To win big, you must lose small!
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