When you are in a trade, regardless if it is going in your favor or not, ask yourself this question: Are you in it for this trade only or are you in it for what your portfolio will be worth at the end of the year?
In my previous post, entitled, “Finding the Stock Market’s Moneyball“, I talked about how Oakland A’s manager Billy Beane started from the top goal that he had for the season and worked his way down.
Here is my version of what it looked like:
1st: Make the Play-Offs
2nd: Win “X” amount of games
3rd: Achieve “X” amount of runs
4th: Sign Players that achieve the third goal, which there by allows us to achieve the second goal, which thereby allows us to achieve the first goal.
It’s that simple.
For me and my trading, and how I’ve traded over the years, it doesn’t look much different either.
Here are my goals:
1st: Make a return of “XX.X%” on the year.
2nd: Have at least “X” amount of winning trades and no more than “Y” amount of losing trades on the year.
3rd: My winning trades average no less than “$X.XX” amount per trade; my losing trades average no more than “$X.XX” per trade.
4th: Trade stocks in such a manner that will achieve the 3rd goal, and at such a frequency that it will help me to achieve the 2nd goal which will thereby allow for me to reach the 1st goal.
But you’re probably reading this and saying, “What does this have to do with consistently picking winning stocks time and time again.
It has nothing to do with it! That’s because trading successfully isn’t about finding winning stock picks, but managing trades in a winning manner. That is by capturing gains, and minimizing losses. I’m convinced, I could let a person who hates me to the core pick the stocks that I trade and I’d likely out perform most other traders not because the person picked great stocks for me, but because I managed the trades properly.
To break it down another way, I would say this:
– 20% of trading is about finding the ideal setup
– 80% of trading is about knowing when to get out
If you are good at the latter, you can make up for the short fall in the below average ability at finding winning trade setups and entry prices.
But you might say, “Entry prices are incredibly important – if you you don’t get in at the optimal point, you won’t make anything on the trade.”
That’s true, but knowing when to get out is also about knowing when you didn’t get in at a good price. If that is the case, you have to have the wherewithal to know when to get out with a minor loss, and get back in (if you desire) at a more optimal time. If you can’t do that, then you’ll never get that second chance at the trade.
So let’s go back to my original question: “Are you in it for this trade or are you in it for what your portfolio will be worth at the end of the year?”
Your focus cannot be based on the notion that “this stock has a lot of potential, so I’m holding” or “This stock is a game-changer…and I got in it extremely early”. That may all and well be true but your focus has to be on the 1st, 2nd, and 3rd goal. Your trade and how you manage it, should be to that end. It’s not about making some huge windfall on an individual trade. It’s about you and managing your trades to meet the overall goals you have set for yourself as a trader.
And quite honestly, for every one stock that I have ever held on to and banked some major coin off of it because the potential was far greater than the current gains it already had, I have closed out ten other stocks that’s potential never lived up to what I thought it had to it. And out of those ten, I would lose most or all of the gains that could’ve been had, had I simply just managed the trade according to my goals.
That is why I am a huge proponent of selling into strength, and yes I realize the stock could rally another 1,000,000% after I get out, but I honestly don’t care. I trade my plan, and that is to achieve #1, by doing #2 and #3. And in doing so, I will have made much more over the course of the year than I would have by holding out hope for that one stock that I think is going to make me richer beyond all my wildest dreams.
Let me tell you this my friends, you have to dis-attach yourself from the pipe dream of nailing the big one. How many times do you go fishing only to cut the line when the fish isn’t as big as you hoped for, or when you are on a fast break all by yourself in basketball, and you can make an easy layup, do you run back to the 3-point line to try and get that extra point. Take the layup my friend, because at the end of the game, you want to win.
And at the end of the year you want to have reached your trading goals.
Remember this:
What does it profit a man, if be makes the biggest return on a trade, but loses his entire net-worth at the end of the day!
Think about it!