(06/22/12) 3 Subtle Changes That Pay Off Quickly

Often, traders and investors are much closer to achieving their goals than they think, writes Tom Willard of RevolutionaryTrading.com, suggesting three subtle ways to continually improve and avoid costly trading tailspins.

There are a few critical things to remember and keep in the forefront of your mind if you want to propel yourself to more success and more income and wealth from your trading and longer-term investing.

First off, you are closer to greater success than you probably think. When you go back and study your trades, look closely. What if you went the other way? What if you used a bigger stop with smaller shares? What if you used a smaller stop with bigger shares? What if you took a different trading approach, buying pivot breaks when they are supposedly trying to “shake you out” of your position?

Be creative as you think and wrestle with the possibilities. What you will find is that it’s just a few small things here and there, like a decision made two seconds earlier, and the results might be remarkably better than what you experienced.

These are not massive changes; they are small adjustments in thought, timing, and execution. Execute these small changes and it can double or triple the money you make in a very quick manner, but you have to study and learn from your mistakes so you know which small adjustments to make.

Secondly, what happens to you actually happens for you. If you had a bad trade or bad trading day, then that is exactly what you need to move forward. There are some vital things that all traders must learn in order to earn the right to make the money that they desire from their trading.

So every experience you have in your trading and investing—win, lose, or draw—serves to educate you on how to earn an amazing income from the markets.

Thirdly, you must have damage control stops. A stop is simply a point at which you will admit your trade is not working in the intended direction and you will lock in your loss on that trade to protect your account from more severe damage.

For example, some traders have described their tailspins into financial disaster to me. Typically, traders will go into a tailspin that occurs over a series of trades in one day or a series of trades over consecutive days that severely damage their accounts. If you analyze all of the destructive days or weeks that others have gone through, you will find that they almost all have the same common denominator: at some point in the midst of these common trading tailspins, the traders decided not to implement or take stops on their trades.

Often, this could be to protect their egos from another small loss in hopes that their position would turn around and make them whole again.

Building on this, the importance of having a daily loss limit is also critical. For example, say that the maximum amount you are going to allow yourself to lose in a day is $500. You’ve gone through your stats and trades and realize that a $500 loss is completely digestible by you as long as you limit it there.

So, let’s imagine that on one day, you hit $400 in losses. The trader who honors their daily stop makes sure that the share size on the next trade is set so that if they get stopped out, their loss on the day will only hit the $500 threshold. No matter what, once that threshold is hit, they are done trading for the day. There’s no chasing “just one more” trade to try to get it all back.

The natural inclination for most traders is not to reduce shares when they are losing, but rather to increase their risk to try to get the money back sooner. This is the root cause of the massive drawdowns traders can experience. They don’t set their daily loss limit and as they lose more, they take bigger positions and get looser with their stops—or worse, they decide that they won’t take their stops.

Realize that some very small changes and adjustments to the choices and execution of your trades will lead to a significant benefit to your bottom line. Don’t forget to use all of your daily experiences—good and bad—to your benefit and take continued steps towards trading mastery.

And finally, to prevent the trading tailspin, the use of a stop loss on all trades and a daily stop loss can help keep your accounts safe from emotional revenge trading. Take on these three things right away and you will be stepping towards greater success in your trading and investing.

By Tom Willard, active trader, investor, and partner, RevolutionaryTrading.com