We’re beginning to wrap up our discussion of capital preservation. In this week’s 4-Minute Drill, I’ll elaborate on the following 5 main bullet points on the topic:
- If there were a holy grail in trading it would be to be accurately capitalized
- Never add to or average down a losing position as a day trader (not necessary for investors). Take your loss, move on.
- Always have an actual stop in the market… not just a mental stop
- Know your market…
- Be willing to stop trading and re-evaluate the markets and your methodology when you go through a string of losses (Norman’s number is 7-8 losses in a row)
Can you relate to any or all of these 5 main points? We want to hear from you… just hit the comment link below!
Hi.. Norman Hallett here with your next 4 Minute Drill for Traders.
We’re rounding third and heading for home with our discussion on preserving capital… which I’ve dubbed as “the trader’s best friend”.
In this segment, I like to hit on a few final bullet points for you…
First… If there WERE a Holy Grail in trading, it would be To Be Adequately Capitalized.
You need to have enough money to trade and take small risks. By having consistently taking small percentage risks compared to the the size of your account…
.. you’ll survive any series of losses long enough to prosper.
I know of MANY successful traders who wiped out small accounts early in their careers.
It was only until they became adequately capitalized and took reasonable risks that they survived, then prospered as long term traders.
NEXT…Never add to or average down a losing position. If you’re wrong, ADMIT IT, and get out of the trade. I’m speaking to Traders here, not Investors.
As an investor, there are some strategies that involve averaging down, that sometimes take years to mature to profit.
But for us as traders… averaging down is a bad idea. Take your loss and move on.
NEXT UP… Always have an actual stop in the market. “Mental Stops” don’t work. Why? Because of your power of justification.
When you have a mental stop in, your mind… almost automatically… starts to justify why it would be OK to give the trade a little more time when your mental stop is approached.
Don’t outsmart yourself. PUT AN ACTUAL STOP IN. It’s much harder to make a physical move to lift the stop if you start justifying…
…which will result in keeping your stop in… which is what you want!
Put your stops IN … and follow your trading plan.
ANOTHER POINT to preserve your capital… is a simple one… KNOW YOUR MARKET…
Now, I trade primarily futures contracts and I can tell you from personal experience that you need to know when government reports come out, crop reports., first notice days… everything about a market.
And I’ll go a steep further… I’ve learned to be aware of strong SEASONAL patterns to help me determine which direction to trade in… BOY.. I can’t tell you how helpful knowing your seasonals is.
For stock traders, you need to be aware of dividend payout dates, major reports in the sector your stock is in, and of course earning reports of the stock your trading and the major stocks in the sector, whose movements can effect your stocks.
There’s nothing worse than taking a surprise loss because you didn’t take the time to KNOW YOUR MARKET and you forget to check if there were any reports coming out that day.
You feel like a total idiot. And I could probably make a case that you are.
So, please… KNOW YOUR MARKET.
and MY LAST POINT for today.. be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses … like 5 or 6 in a row… or 8 out of 10 trades.
Many times, your review will result in no change, and you’ll continue trading with the same parameters.. but you’ve given yourself a mental break and you’ll be ready to go again with a refreshed positive attitude.
OK.. that’s it for this addition of 4-Minute Drill for Traders.
Next week, we’ll be wrapping up out focus on Capital Preservation… so don’t miss next week’s Drill.
and until then…
Category: 4-Minute Drill for Traders