Dear brethren: I would like to discuss the importance of a trading plan before we execute our trades (plans). As Rogue Trader has put it so well, great traders know they must let their rules trade for them. The old maxim says: "Trade your plan, plan your trade". How do you interpret this old saying? cpo
This quote strikes a chord or 2 with me for sure. Clearly defined entry and exit signals, and clearly defined stop losses etc are totally essential. When I simply follow my own rules, I make money overall; not on every trade, but overall. The problems start when you are under pressure. You've made a couple of mistakes and you are starting to doubt your ability and your rules. That's when the emotions start to kick in big time and boy - do they screw with your head once they get going. It takes me days to get back after a bad day when I've used faulty judgement instead of the rules. I always sit down for a couple of hours after market close and examine everything I did during the day. A good day doesn't take much examination really. Just a confirmation that the rules worked. Bad days however become a de-brief of what went wrong and why. Almost always the main reason is that I moved away from following strict rules to using faulty judgement and panicking over anything. Put simply - I really hate losing and it bugs the hell out of me when I do. I wish I could find a computer where I can get someone to programme the rules in, make it continuously improve the rules for me, and tell me what to do and when! now that I would pay good money for (especially if it really worked)!!!!!
I myself interpret it as wisdom from the trenches and the remedy for the maladies of emotional trading. Chaos and uncertainty outside counterbalanced by order and certainty (to let the rules play themselves out) inside. cpo
For me the best way to guarantee an exact execution of my plan is to make sure my bets are small enough that I am not really concerned about the outcome. It is a simple but effective rule.
Trade as small as you can...Think of the market in terms of ranges as opposed to ticks...Isolate yourself from the "peer pressure" of needing to generate tons of volume or trade "size"...
My reality check is to realize that each trade probably isn't the trade that will make me a millionaire, and it's a waste of time to think of it as such. The best trading quote I have heard is (simply) "take profits while they are there." Why? Most traders are right about the direction of the market, but give most, if not all plus some, of their profits back. Why (again)? They are hoping that THIS trade will run away and help them retire at age 30. The greed monster strikes again!
Unfortunately, it's "the one that got away" that you keep thinking about. Which drives you more crazy, taking a small profit AFTER having a bigger profit, or taking a small profit only to watch the trade go on to be a big profit? For this very reason, I usually employ a two step exit. I unload half with a small pre-calculated profit, and then try to let the other half run.
Inandlong, most definitely. Taking profits should be in graduated steps. I believe that the first partial profits should be taken at the point in which you can cover the costs of your trade and a small profit, PLUS at the same time, move your stop loss to the entry price. The stop becomes tight, but this gives me two advantages: 1) If the move was false and reverses, I get stopped out and at least break even, including costs. 2) I only catch the big moves. Whipsawing action becomes filtered out, thus nerves are saved from wear and tear. I look at it this way. Who is to say a "correction" is not actually a reversal? How long did the stock analysts say that the stock market was merely in a correction, when in acutality a bear market had started? If you take your profits at the end of an up move (or down move) during a correction, you can always re-enter once you are sure that the trend is continuing. J.D. Rockefeller once was asked how he made his millions in the stock market, and he answered that he was happy to take his share out of the middle, i.e. he never tried to pick tops and bottoms. In other words, I should be happy that I took part in a move, period. Shoulda, woulda, coulda is always in hindsight. More often than not, being overly-cautious will save you from devastating losses.
As long as I know that the end result of following my rules for trading will result in a profit, I enter every time my rules tell me too. The same applies to taking profits and losses. Whenever I've broken my rules by pressing into a trade or letting a stock move against me more then allowed by my own stop loss rule, I end up having a bad day, whether it's a losing day or just eking out a profit. In the end, I know my rules make me money, so I don't question them. For long term trading I follow William Oneils CANSLIM method. The only reason I've had trouble making money with his methods in the long term account, is because I can't seem to take a profit or loss as described by him. I've gone back and analyzed my trades and realize that if I would've just gotten out when the sell signal was there, instead of hoping for a bounce back, I would be quite profitable following his methods. I don't make the same mistake with my day trading. Funny how the human mind let's you do things right in one aspect of trading, and then screws you up in another. But that's aprt of the learning, and the best way to learn is to continously analyze your mistakes and good trades.