Two Paths to Trading Success
03/05/2014 9:32 am EST
Veteran trader Dave Landry says that money management can cure a multitude of sins, and if you couple it with the right mindset, you're on your way to trading success.
TIM: My guest today is Dave Landry. We're talking about money management and psychology, and how you combine the two and how they relate. So Dave, I know money management and psychology may seem like two totally different things, but actually they're pretty related.
DAVE: They are, they are. As I often say, money management can cure a multitude of sins. If you are only risking a small amount you're not going to get really stressed out on any given trade, and any given trade can turn into a loss. That's why usually my columns I write protect the stops on every trade, or I'll mention putting your stops, and you've got to be diligent with your stops, make sure you have them in place, and use stops because you could be wrong on any particular trade, and again, if you're only trading on a small size it's not going to stress you out because you'll be able to make that mortgage payment or pay your grocery bills or whatever the case may be, it's not going to ruin your life on any given trade.
Trade your plan, and I'm sorry, plan your trade and trade your plan, easy for me to say. It's a lot easier when you're trading on a smaller size, and people forget about the money management. Everybody seems to be a setup junkie. At shows like this after I speak I'm sure somebody will come up to me and ask me about a setup and we'll talk about it, and that's great, and that's exciting for me too, but when somebody comes and asks me a money management question, I know they've either made it as a trader or they're very close to making it. It's boring, it's not sexy, but you have to have good money management in place.
TIM: So it money management necessarily mean you should know, even before you get into a trade, what your profit target is, what your stop loss is, and you're disciplined about both?
DAVE: Absolutely, absolutely. The saying that I always say is obsess before you get into a trade and not afterwards. I get people all the time, like, what do I do with this stock, it's going 50 points against me. It's like, what do you do? Well, you should have figured out your plan ahead of time, and it's cliché, but plan your trade and trade your plan, but most people can't do that, I don't know why. Somebody once said we're not wired to trade. The trading world and the real world are two different worlds, maybe that's part of the problem, but you could do a lot of things mechanically. You could say, okay, I'm only going to risk so much. This stop is within or outside of the normal volatility of the market and should not go there. If it goes there, I'm wrong, I will get out. If you, again, obsess before you get into the trade and just follow your plan, you're going to do just fine.
TIM: The psychology of trading not over your head in the way that you're making good decisions because you're not worried about the outcome as much. Does that make -
TIM: Is that what you were saying then?
DAVE: Right, absolutely, and then the other thing people will do is they'll put on a big position in something and then that will go horribly wrong, and then they'll say well I better just grist a little bit on the next one, and then that one will be the big huge winner.
DAVE: So consistency is key, and I can't emphasize enough how important the money management is.
TIM: Dave, thanks for your time.
DAVE: Thank you so much.
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