My Number 1 Rule for Trading
A lot of experts will tell you that the #1 rule for investing and trading is to cut your losses short.
The reason for this is mathematical more than anything. If you lose 10% on a trade you can make up for it with a just over 10% profit on your next trade.
However, lose 50% on a trade and you suddenly have to make 100% on your next one just to break even on the 2 trades. A tall order for any trader without using risky options or margin.
This rule is especially important if you are strictly trading growth stocks. Especially growth stocks without a long-term track record of strong growth. All growth stocks will eventually go from a growth stock valuation to a value stock valuation once the writing is on the wall that the growth phase for the company is over.
And the less established the track record of strong growth, the more likely the company will miss-step and lose its lofty growth stock premium in the near future. And it can lose this premium very quickly.
But for those using our methodology, a more important rule to follow is consistency. This is because most of our trading setups are on stocks with rising estimates and that are beating those estimates. The vast majority do not have an excessive growth stock valuation to begin with. (We only look at trading the very elite growth stocks if any are included in our newsletter. The ones with a very well-established track record of strong earnings and sales growth.)
If estimates are rising and they have a track record of beating those estimates, the stock will tend to hold up better during market turmoil. Growth stocks with high valuations tend to get hit hard during a market correction. And they generally are the first ones to be taken down.
So loss-cutting is not quite as important with our methodology. You always need to know where your stop-loss point is but for us this is generally a “mental stop” and not a hard stop-loss order.
Rising estimates and big earnings beats tend to put a “floor” under a stock according to many analysts. And we have found that to be true in our own trading over the past 10 years. So the downside is generally much less than a penny stock or most high-flying growth stocks.
So while loss-cutting is extremely important, its not as important as consistency is with our approach to trading.
Rome was not built in a day and neither are multi-million dollar trading accounts. Whatever your trading strategy, you need to figure out for yourself how to stay motivated for the long haul.
Now don’t get me wrong. You always need to have a loss cutting strategy in place and make sure the risk/reward ratio is very good at the point of entry.
Over the years you will learn more and have a lot of exciting trades that do very well for you. But you have to consistently apply the principles of a good trading strategy year in and year out to reach your financial dreams. And this means making a lot of trades consistently over time.
Now sometimes market conditions dictate that you need to stay on the sidelines in cash or even go short or buy put options. But in most markets there is money to be made on the best trading setups.
And with our strategy these setups are on just those stocks with rapidly improving fundamentals. The fundamentals that are proven to matter over the next few weeks – the time horizon of our average trade.
Choosing a good stock picking service can help you stay focused and consistent. Because a lot of the work has already been done for you. So its easier to be consistent because there is much less time involved on your part.
But even if you go it alone, you need to establish a routine where you spend time each day focusing on trading. With our methodology this could be any time of the day because the entries and exits signals are based on the closing price of the stock. And our methodology dictates that you enter and sell a position at the market open the following day.
So you can put your orders in to buy or sell at 4:15pm or 9:25am the next day. Or any time in between. Whatever fits your schedule.
It will always take a number of trades to get to where you want to go financially. Traders who consistently apply a good methodology over the long-term will be the big winners.
For those who do not have the time to trade each day we now offer Investtobefree.com and the 3 Stocks to Wealth newsletter. This service only requires a few minutes on 1 day per week.
June was another terrific month for the new newsletter. As I write this, the newsletter portfolio is up about another 10% since the beginning of June. Getting close to a double within the first year and a half of the newsletter.
Its a great option for those pressed for time and still want to crush the market averages.