Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved.
Over nearly 30 years of investing and trading, I have discovered one secret that every trader should know. The title of this article gives it away, but before I explain it, let
me share with you some anecdotes.
Five Cent Jill
Jill is a trader new to the club. She has been in the investment business as a broker and financial adviser for a number of years, but quit her job to trade full time.
Almost every time that I heard from her, it was the same refrain: "All I have to do is net a dime each trade." When multiplied by 1,000 shares per trade, that small amount turns
into $26,000 a year, trading once each day and winning. She often places up to 6 trades per day, potentially making $156,000 per year, all by netting just
a dime per trade.
Of course trading is never that easy. Commissions and other trading fees add to the profit required as do losing trades. Yet earning a dime per trade sounds so easy,
yet she could not do it on a consistent basis. Why?
Large Loss Larry
Before I answer that, let's turn to another trader whom I'll call Larry. He is an experienced trader with over a decade terrorizing the markets. But if you were to look at his
portfolio, you would be shocked at all the red ink. Positions are down by 25%, 40% and even some by 50%. To balance that is just one well-performing stock, up 50% and another up 20%.
"Those losses are too large to sell," he told me recently. It's like he was pretending to be AIG or Citigroup. How did those losses get to be so large? By dropping one penny or one
dollar at a time.
Yet another trader, Bill, looks at the stack of bills on his dining room table and wonders where he is going to get the money to pay them. Each day he trades adds more to the loss column.
Everything he tries ends in failure. His trading capital is dwindling despite taking multiple cash infusions from his wife.
He tried to double down, buy twice as much as the stock dropped
only to be forced to sell at the bottom. Within days, price began a long, straight-line run up, but he was too broke to participate in the rally. He could only watch from the sidelines
until his wife cashed her next check.
All three of these traders have one thing in common. Can you guess what it is? The answer is the one secret all traders must know.
I have told this secret to several traders over the years and not one, not one has believed me and put it to good use. Why? I guess they just weren't ready for it. Will you
be the same? Can you handle it?
What's the secret? It's this: Forget about the money!
I know, you were expecting something revolutionary, something so unique that it would make you millions. Guess what? You just heard it. Here's what I mean, so pay attention.
If you ignore how much money you are making or losing on a trade and just focus on execution, the money will take care of itself. It's that simple.
Five Cent Jill
Let's review each trader, starting with Jill. All she wants to do is make a dime. If she would concentrate on executing her trades according to plan instead of settling
for just a few pennies, she would do much better.
Now, when she makes a dime, she gets so nervous about losing it that she sells her position too soon.
When she buys the next time,
she sits paralyzed when it goes bad because she keeps thinking that as soon as the stock rises by a dime, she'll exit for a profit. Instead, she settles for a loss.
Forget about the money and concentrate on execution. Does she have a stop loss order in place (or a mental stop for a day trader)? Does she search for overhead resistance and
exit when price levels out there? If she were to just focus on the trade instead of worrying about the money, she would do fine. But she doesn't believe me and keeps losing money.
This is a picture of a worm I caught eating one of my plants. The creature is about the length and thickness of your middle finger. Huge, in other words!
Large Loss Larry
Larry is the trader with huge losses that were too large to sell. I told him, "It doesn't matter at what price you paid for the stock. What matters is when you sell." If you sell above
the buy price, you will make money. If you have a stop in place, then that would limit losses to well below 25%. Yes, a dead-cat bounce can
take you down over 70% in one trading session, but his losses did not occur that way. They occurred by inaction, the stocks dropped a little each day while he was off counting the pennies
on his winners.
All Larry has to do is monitor his trades. Look for support and resistance in the stock, and when it looks as if the market is going to drop or the industry is showing signs of weakness,
then sell. Do not get married to a position. Do not fall in love with a stock.
If Larry ignores the size of his losses and just looks at what price is doing on the chart, he would not have piled up such massive losses. Does he listen? No. How about you? Are you
still with me?
Bill is up to his eyeballs in bills, and I'm not talking children, here (little Bills). He is so worried about paying his debt that he cannot execute his trading plan. His desperate
attempts to double down end in disaster. Increasing leverage in his state of mind has compounded his problem. Again, if he only focused on his trading and forgot about the money, he
would do much better.
Imagine how stressed he is. Now imagine how less stressed he would be if he just focused on price rising and falling, ebbing and flowing like the tide. If he only traded what
he saw on the screen instead of making large bets to earn enough money to pay the mortgage, he would be in a better state of mind. He would be trading better.
Money Honey Tom
Let me give you an example from my own experience, and how I stumbled onto this secret. Several years ago, I had a problem with earning too much money. It sounds stupid, but as soon
as I earned about $2,000 in a trade, I would sell it. I cut my winners short.
Once I learned to stop reviewing my earnings statement each night after trading, I did much better.
If I didn't see my profit and loss statement, I wouldn't get excited about making two grand and sell. I could focus on technique and let profits ride. That made a huge difference.
So that's the secret that every trader must know. And now you know.
Focus on trading better instead of the money and all the world's riches can be yours. Well, maybe not, but if you come close, please share!
-- Thomas Bulkowski
Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved. Chicken Little was right.