Tuesday, October 31, 2006

Better Ingredients == Better Pizza.

I recently finished listening to the Dave Landry webcast (Oct11, on trading psycology) for a second time . What he had to say resonates with a couple of the problems that I've been having with my trading. There is some good advice there which could almost be considered trading rules.

1. Obsess before you enter the trade, NOT after!
Whether you're a day trader or a swing trader, this rule rings so true - after you've entered a position, there's really only two things that you can actually do: sell, or watch. If you sell early (ie. actively close your position before your stop hits), then that means you're either NOT proven right (debatable, but I will elaborate in another post), or you're not honouring your stop loss. He encourages entering alerts - alerts for when the stock is close to your profit target, or even close to your stop. Once you have your alerts and your stops in place, and the market hasn't yet given you a reason to sell, then all you can do is watch, and at that point, then you need to ask yourself whether that is the best use of your time.
However, before you enter a trade, there are many things to check, including:
- confirm market trend,
- confirm sector trend,
- confirm stock trend,
- confirm acceleration and/or persistency of trend,
- confirm stock trades cleanly,
- double/triple check that your initial stop is correct.

2. Trade management: Active vs. Micro.
micro-management (bad) - making too many decisions, exiting too early, not letting the market decide when to take out your stops. The rationale here being that micro-management increases the probability of missing out on the big trending up runs.
Active management (good) - putting in limit orders when the price is close to profit target.

3. The method for digging out of a hole is simple (at least according to Landry):
Trade smaller position sizes.
Honour your stops.

4. 80/20 rule: 80% of your profit comes from 20% of your trades.

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