Like two mountain climbers, we traders need to anchor the pitons, so to speak, in an effort to limit...
Trading Lesson: 18 Resolutions for Successful Trading
01/05/2018 12:48 pm EST
Are you going to be the great trader in 2018 that you were meant to be? Or, are you going to fall into your old habits? asks Dave Landry, founder and president of DaveLandry.com. More Trading Lessons every Friday on MoneyShow.com.
Well, It’s that time of year. A time to look back at last year and more importantly, to look ahead to a new year.
Keep these 18 trading resolutions, and I can all but guarantee you a prosperous 2018.
1. I will only take trades when conditions are conducive to my methodology.
For a trend follower that means that the market is significantly higher than it was (or lower for shorts). If the market has been trading sideways for months, then I will only take trades that I truly feel can somehow excel in spite of lackluster conditions.
2. I will carefully plan all trades ahead of time and then work diligently to follow that plan.
Unknown or changing information creates stress (Montier). You must plan while things are static. You won’t know how things will shake out once the market opens, but at least you’ll have a plan to deal with it. You can’t plan during the heat of battle. By then, it’s too late.
In my Trading Service, I lay out a very detailed plan nightly-where to enter, where to place the protective stop, and where to take initial profits. However, in spite of all this planning, I still get a plethora of emails. XYZ triggered yesterday, and now it’s up 2 bucks. I didn’t take the trade. Is it too late? Should I get in now? I know ABC hit the stop last week but I’m still in. Do you think it might come back?..and so on and so forth...
3. I will only take trades that trigger an entry.
It often amazes me how many losing trades can be completely avoided simply by waiting for an entry. As I’ve said ad nauseam, I often get emails from clients complaining about some loser that I recommended. The conversation often goes something like this:
Them: Dave, I’m down 50% in XYZ, what should I do now?
Me: XYZ? That stock’s been headed lower for months. Why did you buy?
Them: Because you recommended it.
Me: I’d never recommend a potential long that’s been headed lower for months.
Them: Yes you did!
Them: 6-months ago.
I check the charts and lo and behold it was a beautiful setup back then. However, it not only didn’t trigger but it continued to implode.
To win, you must lose as little as possible. Druckenmiller once said that, “The way to build long-term returns is through preservation of capital and home runs.” Amen!, my brother from another mother! The preservation of capital comes from picking the best and leaving the rest and then, making sure that they trigger in the first place. This brings us to our next point.
4. I will pick the best and leave the rest.
When asked about a holding period, my answer is always “10 years, hopefully much longer.” When I pick a setup, I truly believe that the stock has big potential. Don’t deal in mediocrity. When you do think you’ve found something great, just make sure it truly is intuition and not “into wishing” (Market Wizards).
5. I will be patient.
Tom Petty got it right. The waiting is the hardest part. Sometimes it’s hard just to sit there when the market is grinding sideways, but that’s often the thing to do, nothing. Yes, do your homework in spite of the conditions but make darn sure you have the mother-of-all setups when you don’t have a tailwind.
6. I will do my homework, leaving no stone unturned.
I will look at a plethora of stocks daily (for me, it’s at least 2,000). I will study all the sectors, major ETFs, bonds, indices, and commodities. The harder you work, the more likely you will have a feel for the markets. And, “the harder you work, the luckier you get.”
7. I will only trade the charts and ignore all other extraneous information.
I’m obviously a big fan of technical analysis. The reason is that the only way to make money trading is to catch a trend. The chart must move higher after I enter (or lower for shorts). The charts do not lie.
As I preach, the news is noise. Yes, news effects markets but you can’t factor it into your trading. First, you don’t know what’s going to happen. Any of you got it wrong on Brexit or Hillary? And, if even if you were able to predict news correctly, you’d often find that the reaction was often muted or quite often the opposite of what’s logical.
Read my lips: I ignore all news. I know I’ve said this repeatedly, but I’d be willing to bet in the not-so-distant future I’ll get an email saying: “Hey Big Dave, XYZ has earnings next week. Should I bail?” Nope. Follow the plan.
8. I will place a protective stop after a trade triggers.
I will place a stop because no one knows exactly what a market will do next. That goes for you, me, and the guy who screams on TV.
9. I will take partial profits when offered.
Everything’s a probability at best. And, a market is much more likely only make a short-term move than begin/resume a longer-term trend. Therefore, you can’t look a gift horse in the mouth.
You must take partial profits (half) when the swing trade target is achieved. If it does turn into a major trend, then you’re still in. And, if it doesn’t you scratch out (barring overnight gaps) for what I have dubbed the “better-than-a-poke-in-the-eye” trade.
10. I will not take any unnecessary action thereby micromanaging myself out of trades.
Micromanagement comes in three forms. First, you might exit trades because you think that they have gone “far enough.” The problem with that is that if you quit at 25%, you’ll never make 50%, and if you quit at 50%, you’ll never make 100%, and if you quit at 100%, you’ll never make 1,000%. Again, remember that successful trading is “preservation of capital and home runs.”
The second form of micromanagement is attempting to mitigate losses by exiting at the first signs of adversity or if the stop is neared but not officially hit. Yes, I’ve been there and got the T-shirt. Way back when the earth was still cooling, I shorted Dell around 50. I then got my father in the trade with me. I planned to have a stop at 55 and told myself that was the plan. Instead of focusing on my day job, I called the automated broker system repeatedly for quotes. When the stock hit 54 7/8 (stocks traded in 1/8ths back then) I figured it was close enough for government work. I pulled the plug and notified my father to do the same. That turned out to be the high tick. Dell then imploded to single digits. For many years later, my dad would occasionally say, “You remember that Dell trade?” Arrrrg!
The third form of micromanagement is exiting a trade because the stock is just treading water. A reoccurring theme for my Week In Charts is the Dead Money Report. I often show stocks that drifted for days, weeks and sometimes months before taking off.
But wait, as a trend follower, shouldn’t they be trending? Yes, they should be trending before you get in but remember that the market often doesn’t move in your time frame. As I preach, trading, done properly, can often be quite boring. This leads us to our next point.
11. I will seek excitement and entertainment outside of the market.
If you’re looking for action, the market is a very expensive place to look. As I preach, have an affair instead. That way, you only lose half of your money. All kidding aside, find something to do other than staring at a screen. I keep myself crazy busy. I’m often here before the sun comes up and long after it goes down. That doesn’t mean that I'm sitting here staring at a screen. I'm writing/working on content, answering emails, doing research/analysis, giving webinars, or planning the next leg of my Big Dave’s Trend Following Moron World Tour. The more you do stare at a screen, the more likely that you’re going to put yourself into a “state of regret.” And, further, the more likely you will be to take unnecessary action. “Be as close to the market as you need to be but no closer.”
Busy traders make good traders. A client of mine has had his struggles with trading but recently told me that his trading has “gotten a lot better.” Did he discover some Holy Grail? Nope. One of his doctors quit, and he had to pick up her shift at the hospital. He no longer has time to deal with mediocrity in the markets. He has no choice but to only take the best and leave the rest.
12. I will accept what the market is willing to give.
I have the privilege of working with great doctors, engineers, entrepreneurs, and even a well-known dog trainer. These people are very successful, and their intelligence humbles me. I might not know you (yet?), but I’m willing to bet that you’re smart. How do I know? Trading attracts some of the brightest minds out there.
nfortunately, the same people who are attracted to trading often make the worst traders. One reason is control. You didn’t become successful in life without a high degree of control.
Unfortunately, in trading you have none. You’re either going to win, lose, or draw on a trade. You can’t control the outcome but you can control yourself. Pick the best, leave the rest, and then let the chips fall where they may. The so-called serenity prayer comes to mind.
One more point here: Remember, all trades will eventually end badly. You flat out lose, you make a little then get stopped, or you make a lot but then give up a sizable portion of profits in the end. Knowing ahead of time that there’s going to be some pain in any trade makes it a lot easier when, not if, it occurs.
13. I will do an honest post-mortem on every trade.
Years ago, one of my big epiphanies was finding myself saying “what in the hell was I thinking!” when looking at trades of the past. The stock (or other markets) was choppy, and there was no obvious discernable pattern. Regardless of the outcome, go back to day one and ask yourself, was there an obvious or emerging trend? Was there overhead supply? And, all of the other things that I said to look for/avoid in the 14-hours of my Stock Selection Course. If you can't afford the course, make sure you at least watch the 1-hour video on that page. Many of the things to avoid are outlined there.
14. I will reward myself for following the proper process regardless of the outcome.
“Outcomes are noisy.” (O’Dean) You can do everything exactly right and still lose money. Conversely, you can wing it and do quite well. Warning, dead horse beating follows: The market is often a bad teacher. Yes, you might have a string of success shooting from the hip but longer-term the only way that you’ll be successful is to follow the process.
15. I will hold myself accountable.
I have a very smart client that has an excellent grasp of the trading process. His stock selection is very good and he “gets” my swing-to-intermediate-term hybrid approach to money management. He has periods of great success but then begins to abandon the plan through a host of bad behaviors. You name ‘em: taking less-than-ideal setups, trading big picture ideas, etc… I asked him, would you be willing to get your wife involved with your trading to help you from deviating from the plan? “Oh no,” he replied, “that would end our marriage.”
Okay, maybe your spouse isn’t the best person to get involved with your trading. Do find someone who is willing to give you the tough love that you might need. And, if you don’t want to get anyone else involved, just make sure that you at least hold yourself accountable. Because so many are looking over my shoulder, my accountability is that I must make sure (again) that I leave no stone unturned when it comes to looking for opportunities.
This is especially true since many of my clients are good stock pickers. Every night I stress that a client might find something that I didn’t so I make sure that doesn’t happen. Once opportunities are found, I know that I must stick to the plan. Yes, I’m human and tempted to micromanage and a host of other bad behaviors, but I know that I must stay true to form. As I’ve written before, my educational business makes me a better trader because I’m forced to practice what I preach.
16. I will embrace my emotions.
I purposely used the word embrace and not eliminate because it has been proven that you can’t function properly as a human being without emotions. (Damasio, Shull) Every decision, even what you are going to have for lunch, comes with some emotions and stress. To wrap your head around this, become cognizant of your emotions in both life and trading. Also, reduce the number of unnecessary decisions that you make by simply following the plan. Remember, fewer decisons, less stress.
17. I will believe in what I see and not in what I believe.
I’ve been developing a massive course in trading psychology on and off for years (one of my resolutions is to finish it in 2018!). As part of this project, I took a personality test a few months back. I scored a 0 in agreeableness. That explains a lot. Now I know why I get so frustrated when the market doesn't do what I think it should. This was an epiphany for me.
It's hard to work hard and not get the expected outcome. That’s trading. As I preach, unless you’re Bill Clinton, what is, is. There might not be any good reason why a market is headed higher or lower, but it is.
18. I will print off this list and refer to it often in 2018.
May the trend be with you!
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