Option Trading College
Subject: Controlling Losses
Entry is Key...Exit is Everything! TM
Session 1 – Principals to live buy
I feel this section of my training sessions is the MOST important part of any successful trading plan. First off, in order to properly learn how to control losses, you absolutely must have a solid set of principles in place....and then the trick is NOT to violate those principles—easy to say, hard to do sometimes.
Here are the principles I practice and respect every day of my trading life!
Principle 1 – BE HUMBLE!
How do you practice humility? You MUST have a plan of action before you ever put a dollar of real money into the markets. If you do not know where your are going, then you will never know when you have arrived.
—Those who fail to plan have already planned to fail.
Principle 2 – Record Your History
You must keep a daily log of your actions so you can learn from your mistakes rather than repeat them...again and again.
As intelligent as traders may think they are, there is no substitute for a well documented history of your winning and losing trades. If you "wing it" then you are doomed to repeat your history of losing trades and compound very bad habits. Learning from your recorded mistakes is the number one way to build a track record of trading success.
In the trading world, history does not just repeat itself, it actually accurately predicts your future if you fail to keep track of it.
Principle 3 – Continuing Education
You must continue, relentlessly, in your education on trading. You will NEVER know everything because the world of trading is always changing.
Principle 4 – Controlling Emotions
You must master your emotions within your trading practices. If you follow Principle 1, strictly, your emotions will be kept closer to neutral. Yes, I said closer, because you will never be able to keep them in a box. Principle 2 is the best way I know of to keep a very short leash on your trading emotions.
Principal 5 – Money Management
Management of your money is critical to making a long-term profit in order to trade for a living. Many new traders (me included) take a cowboy approach to this business and literally get the snot kicked out of them. Not only do you lose your money, but many times, the sting is so strong, it affects your ability to recover the nerve to keep trying.
Principal 6 – Relax
Take time off to enjoy life, family, hobbies, etc. Trading can become a ball and chain when you are struggling. You must have an emotional release to help ground you when times get tough. One way I do this is by taking a 2 or 3 day mini-vacation if I am having a tough week. If I am having a great trading week, I reward family members with gifts because it feels so good to give to others; and it builds confidence in my growth as a consistently profitable trader.
Once you develop a consistently profitable trading business, consider starting a foundation and use a percentage of your profits to help those less fortunate than yourself!
Principal 7 – Know Thyself
Trust your feelings more than your brains ONLY if you have adhered strictly to Principle 1 and Principle 2. Trading is like learning to drive a stick shift automobile. You have to go through a steep learning curve before you can master the skills to act unconsciously.
Session 2 –
Compounding your money
Here is some interesting statistics that you should be aware of before you start on your path to trading bliss:
Many traders have no idea about the power of compounding interest, nor do they have any idea what the actual cost of a loss is and more importantly, how much it takes to recover that loss.
Imagine a Billionaire (Daddy Warbucks) is presenting you with two choices.
(Note: there is no wrong answer)
The only rule is that you must make an immediate decision!
1. In one hand, Daddy Warbucks holds a check for $1,000,000.00 with your name on it!
2. In his other hand, he gives you one penny ($0.01) and then says hew will double that penny every day for the next 31 days.
Make your decision now!
Many people will choose number one out of greed more than knowledge.
It's been said that most instant millionaires will be broke in a short period of time because they do not know the true value of money; therefore, they do not respect it and quickly dwindle it to nothing because they never developed the skills to making money in the first place.
I am sure you have heard this saying, "You know, money certainly does not grow on trees!"
I have to take exception to this, because with property trading disciplines it can actually become a true statement; however, most people use it as a negative statement NOT to achieve wealth, when in fact, if you were to understand the concept of wealth accumulation and master the disciplines to making it work for you, then you will indeed say money does grow on trees.
How does one make a money tree trading?
It takes some time, commitment and a lot of (smart) work to grow a money tree and get a perpetual harvest that rewards you forever.
Here are the steps to creating your money tree:
First you must prepare your soil (Principle #1 #2 and #3)
Then you must plant your seed (fund your trading account)
Next you cultivate and take care of your tree as it grows (Principal #4 and #5)
As time moves forward, your seed becomes a tree of money that you can pluck from daily as perpetual wealth is continually accumulated.
This is true wealth!
Wealth can renew, but riches can be wiped out—become wealthy and you, your family and your future generations can better control their destinies!
Now, remember my question above?
Did you choose the Penny?
Some people realize I am up to something and will choose the penny, but really do not know what they have done. They believe it will be worth more than the million dollars and are eager to see how long it takes; however, they have no idea what the compounding effect will do.
Let's look at a chart below for the results of a penny compounded vs. taking the Million Bucks!
It's simply amazing if you can grasp what this chart shows you about compounding your investment!
A simple penny (properly managed) can become a money tree that pays dividends for the rest of your life!
If you fail to grasp the concept of compounding, or refuse to put the discipline in place to make it work for you, then you are doomed to trading failure.
Compound your way to trading bliss!
Session 3 -
Did you notice my tag line on the home page?
"Entry is Key...Exit is Everything TM"
Well, those words I coined were learned from very hard and expensive experience. It's quite easy to get into any old stock or option position, and many, if not just about everyone does not know how to properly exit a trade. Most of the educational outlets like to sell you the "sizzle" and do not like to give you the "steak" or, in other words, the definite downside to trading.
I hope you genuinely take-to-heart my words and then have the wisdom to actually apply them—it will save you literally thousands of dollars and tremendous amounts of stress levels—because if you do not have a well defined exit strategy, then you are going to suffer a lot of financial pain!
A trader who does not count the cost has nothing to gain...The donFranko
So, let's look at the cost of a trading loss.
Many people plant a seed in hopes of developing a money tree; some get excited when the first fruits appear and pluck them; however, this is a big mistake—you must nurture your tree and develop it to its full potential before you start to enjoy the fruits of your labor.
There will be losses (more like setbacks if you have principle 1 in tact) that will happen; and if you are not careful, your money tree will not recover; and you will be forced to plant another one.
Taking profits from your money tree too early will diminish the growth of that tree and ultimately the BIG rewards it will give you—be patient and let it grow large enough to pay you handsomely.
Now, let's take a look at this chart below and see how losses can cripple you in NO TIME!
*These figures do not take into consideration the outside cost associated with trading: commissions, trading expenses and taxes.
As you can see, you might think a loss of 33% or even 50% is acceptable on a given trade, but in fact, it's actually a huge burden to overcome. Simply put, if you are under capitalized and play with too much of your portfolio in any one trade, you can be quickly devastated!
The first strategy to avoiding massive trading losses in the markets is using all the principles I have outlined above. I would like to reiterate, LOUDLY, that you make a precise, well written, trading plan!
This must contain at the bare minimum:
1. Your goals for trading
2. Your intent each day
3. Your amount of risk you are willing to accept
4. Finally, and in my professional opinion, the discipline to stay in an educational program (books and/or seminars) at least once a month.
NOTE: The best thing you can do is find a successful trader(s) and get mentored by them.
The next strategy is picking the proper investments to risk your money in. How do you do that? You use tools like this website, proprietary trading software, CNBC, FOX, CNN, MSNBC (very loosely), and a good broker to execute your trades.
Let’s take a closer look at these choices:
1. Investment advisory web sites:
2. Proprietary Software
3. CNBC and other news outlets
4. The right
If you are not as experienced as you would like to be, find a broker who is actually making more money than you (trading their own account) and then you can listen to his/her views on investing. There are so many brokers out there who claim to be successful who actually make less than $50k a year; and none of it is from trading their own accounts—to whom are you listening?
The second choice is those "cheap" discount brokers. Many investors think the $8.00 trade is the "deal" and do not realize there is a hidden cost. The bottom line on the execution of trades is to get filled. What you DO NOT want is a brokerage that re-routes your orders to their preferred market makers for the benefit of their bottom line. You MUST work with brokers that give you direct access to the trading floor if you plan on being a day trader of options.
With that being said, the "discount" brokerage houses are NOT the best choice if you are a day trader. I recommend you choose a broker that is "direct access" and make sure they do not route your orders to preferred market makers. If you are a long-term or swing trader, then you do not need to be concerned with this issue and can use the cheap brokerage outlets.
I currently trade with www.TDAmeritarde.com
Session 4 -
Knowing when to trade
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