Never Break the “Little Piggy” Rule

12/12/2011 9:00 am EST


Rob Hoffman

President and CEO, Become A Better Trader, Inc.

Trying to follow fixed profit goals can sabotage even the best trading strategy, says Rob Hoffman, who instead suggests developing a trade plan around small, consistent profits.

Rob Hoffman is my guest on the video network. I know everyone has a trading plan, everyone has rules they try to abide by in trading, but it’s hard to stick to rules and sometimes you break them. 

Can you give me an example of when you might have broken your trading rules and how you recovered from it?

Not too long ago, I had a loss where I was disappointed with the way I handled it.

I actually had a profit in my trade and allowed myself to break a rule I call the “Little Piggy Rule.” I had a profit on the board and I did not trail up the profit and trail up my stop to take a small profit when the market gave it to me. I instead turned that profit into a larger loss completely unnecessary. 

That’s something I really encourage people to focus on, this concept of the little piggy. Being slow, steady, and consistent in the markets is so important, especially in today’s environment where there’s a lot of choppiness in the markets.

The market is moving at the speed of light these days since we all have access to our computers, and so slow, steady, and consistent is very important. I often have people call me and say, “Rob, I just want to make X number of hundreds of dollars a day.” The problem is when you put yourself into that bucket, you set yourself up for the little piggy concept.

I had done a mid-year analysis and was very happy where I was at, but I wanted even more. So I found myself taking a trade where I widened my risk parameters and didn’t trail my profit. I broke some very cardinal rules and took a loss on that.

It’s a reminder for everybody out there. By putting yourself in a position and saying “I must make X number of dollars today,” what happens is if you’re making $80 on the day and your goal is $100, you think “I’m just $20 away, just one trade away from success.”

You get a little more aggressive, thinking “Let’s get up to that daily goal,” and then what happens is you turn your $80 win into a couple hundred-dollar loss. How’s that going to make you feel? 

It’s really important that we establish these rules in the comfort of our home, when we’re not trading, because it’s in the off hours when we are our most rational selves, aren’t we? When the market is not open or we’re not in a trade, that’s when we’re going to make the best decisions.

When you put that trading plan in place and it comes time to execute on it in the middle of the trading day, it’s so important to stick to your goals, stick to the plan in the middle of the day. I can’t encourage that enough.

When you said that you didn’t trail the stop, was it distraction? Were you doing too many things, or did you take on the market and say “I’m better than you?”

Exactly, I said after a great run and just recently saying that I want more out of the markets; I want to go above my annual goal, so I moved the goal posts.

By doing so, I deviated from my plan and had this profit on the board—which was a generous profit, especially given the market conditions—and yet decided “Nope, I’m going to be better than the market and I’m going to make it a bigger goal.”

In other words, I broke my rules, and I like to come out and share that experience with people. It made me a much better trader afterwards from the way I recovered from it. 

I just want to encourage other people to stick to the rules that we make in the comfort of our homes, when we’re not in the trading environment, because that’s when we’re our most rational selves and make the best trading plans.

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