Trading plan, cashflow and stops

Folks and friends asked me about my trades and I exclaimed “never better”. Some confided in me with dejected looks and told me how much losses they have made.

From my own experience as well as that of most amateurs in this stock trading game, most if not all folks don’t sell when prices acted against their plan. Nicholas Darvas (who wrote “How I made 2 million in the stock market”) said: Investors are pure gamblers when they stay with a stock even if it continues to drop. A non gambler must get out when his stocks fall.

That is exactly how most traders became gambling investors and console themselves that it is alright to hold on until the stocks pick up again. In other words, they are willing to allow their hard-earned savings to be thrown away indefinitely without any indicative evidence of recovery. It is all HOPE!

Emotion is the worst enemy in share market trading. Hence, a proper trading plan is pertinent to ensure a higher probability of winning any trade.
1. Cashflow plan
2. Open positions
3. stops

Cashflow plan
I usually encourage people to trade with money they can afford to lose. Of course we do not like to lose money but at the very least, we do not have to borrow money to cover the losses, if any.
Some like to trade with margins for leverage. In fact, it is borrowing to gamble in the biggest casino if no proper plans are established. For margin accounts, I propose to use the funds (borrowing) to add positions in advancing and winning trades only.

Open positions
The next area of concern is the number of opened positions. Novice in share trading like to ask for tips and buy whatever sounded good. In the end, he/she has many opened counters. It will be difficult to monitor.
Some gurus encourage a 50/50 win/loss ratio. That means, open 10 trades in 10 counters and hope 5 win with 10% profits and 5 with 5% cut loss. I am not sure how these will enhance chart reading skills and instead may confuse the person following such manner. I prefer 2 or most 3 at one time. Nicholas Darvas (who wrote “How I made 2 million in the stock market”) had many positions and ended not much gain/loss but he made his big money through a few stocks.
Watch a few strong performers and buy one or two (depending on your capital size). Smaller capital traders should hold a small portfolio of one or two.

Stops
Nowadays, most stock brokers have online platforms to trade and the software have elaborated “Stops” of many combinations.
First entry in every trade must have a stop loss – this is the support level from the charts.
Next, when the stock prices begin to rise, move the stop up to the breakeven level so that you will not lose if the price suddenly reverses.
Finally, monitor the stock movement daily by looking at the end-of-day chart only. As a busy employee trying to make extra money, you have no time to check prices in the day. Most successful traders don’t look at prices in the opening hours.
Let the price run until weak signals appear. Sell when weakness confirm.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

cardinal rule 4: trade with protection – protect capital and protect profit by setting trailing stops. 

 

 

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