I have experienced many ups and downs in the capital markets as a professional trader of stocks and options.
I’ve seen poor people become riches overnight – and – I’ve seen millionaires become paupers in an instant.
My mentor told me a story that has stayed with me:
“Once upon a time, there were two Wall Street stock market millionaires. Both were incredibly successful, and they decided to share their knowledge by selling stock market forecasts in newsletters. Each charged $10,000 for their thoughts. One trader was so interested in their thoughts that he paid his entire $20,000 funds to purchase both of them. His buddies were understandably interested in what the two gurus had to say regarding the direction of the stock market. When they asked their pal, he became enraged. They were perplexed and inquired about their friend’s rage. ‘One said BULLISH, and the other said BEARISH!’ he exclaimed.”
The idea of this story is that the trader was incorrect. People in today’s stock and option markets can hold opposing views on future market direction and still profit. The distinctions are in the stock selection or options strategy, as well as the mental attitude and discipline employed in implementing that approach.
In a recent article, I gave some fundamental guidelines for developing and implementing a disciplined and systematic approach to stock market investing. Here, I’d want to structure the suggestions around some fundamental stock and option trading principles. By keeping these concepts in mind, you will be able to continually direct yourself to profitability. These concepts will assist you in lowering your risk and assessing what you are doing correctly as well as what you may be doing incorrectly.
You may have come across concepts like these previously. They are used by me and others since they are effective. And if you memorize and dwell on these ideas, your mind will be able to use them to lead you in stock and options trading.
PRINCIPLE 1: SIMPLICITY IS MASTERY
When you believe that the stock and options trading approach you are using is too complicated even for easy comprehension, it is probably not the ideal one.
The simplest tactics often win in all facets of effective stock and options trading. It is simple for our minds to become emotionally overloaded in the heat of a trade. We can’t keep up with the action if we have a complicated approach. The simpler, the better.
PRINCIPLE 2: NO ONE IS OBJECTIVE ENOUGH
If you believe you have complete control over your emotions and can remain objective during a stock or options trade, you are either a dangerous species or an inexperienced trader.
No trader can be completely objective, especially when the market is unusually volatile. The perfect stock market storm can easily unnerve and sink an experienced trader, just as the perfect storm can still rock the nerves of the most seasoned sailors. As a result, you should try to automate as many essential components of your approach as possible, particularly your profit-taking and stop-loss points.
PRINCIPLE 3: KEEP YOUR GAIN AND CUT YOUR LOSSES
This is the most crucial principle. The majority of stock and options traders just do the opposite. They cling on to their losses for far too long, allowing their equity to sink and sink and sink, or they exit their profits far too quickly, only to see the price rise and rise and rise. Their profits never outweigh their costs over time.
It takes time to master this principle adequately. Consider this theory and go through your previous stock and option deals. You will see its reality if you have been disobedient.
PRINCIPLE 4: BE AFRAID OF LOSING MONEY
Are you like most beginners who can’t wait to get your money into the stock and options market and start trading as soon as possible?
On this topic, I’ve discovered that most unethical traders are more concerned about missing out on “the next big trade” than they are about losing money! The key here is to STAY WITH YOUR STRATEGY! Take stock and option trades when your approach indicates it is appropriate, and avoid taking trades when the circumstances are not satisfied. Exit trades when your strategy calls for it and leave them alone when the exit requirements are not met.
The goal here is to be terrified of losing money because you traded unnecessarily and without adhering to your stock and options plan.
PRINCIPLE 5: YOUR NEXT TRADE MAY BE A LOSS
Do you have such a strong conviction that your next stock or options trade will be a huge success that you will disregard your own money management principles and put everything you have into it? Do you recall what normally happens next? Isn’t it unappealing?
Whatever your level of confidence before entering a trade, the stock and options market has a habit of doing the unexpected. As a result, stick to your portfolio management method at all times. Multiplying your projected triumphs may result in multiplying your very real losses.
PRINCIPLE 6: BEFORE INCREASING CAPITAL OUTLAY, EVALUATE YOUR EMOTIONAL CAPACITY
Don’t you realize how different paper trading and real stock and options trading are?
Similarly, if you’ve gotten used to trading real money on a consistent basis, you notice a significant difference when you increase your capital tenfold, don’t you?
So, what’s the difference? The distinction lies in the emotional toll that comes with the prospect of losing more and more real money. This occurs when you transition from paper trading to real trading, as well as when you boost your capital following some triumphs.
After a period, most traders realize they have reached their limit in terms of both funds and emotions. Are you willing to trade up to a few thousand, tens of thousands, or hundreds of thousands of dollars? Before you commit finances, determine your capacity.
PRINCIPLE 7: IN EVERY TRADE, YOU ARE A NOVICE
Have you ever felt like an expert after a few successes, only to lose big on the following stock or options trade?
Overconfidence and a false sense of invincibility based on previous successes are a formula for disaster. Before entering a trade, all pros respect their upcoming transaction and go through all of the necessary procedures of their stock or options strategy. Treat each trade as if it were the first one you’ve ever made. Always stick to your stock or options plan.
PRINCIPLE NO. 8: YOU ARE YOUR OWN SUCCESS OR FAILURE FORMULA
Have you ever followed a winning stock or options strategy only to fail spectacularly?
You are the one who decides whether a strategy is successful or not. Your mentality and discipline make or break the strategy you use, not the other way around. According to Robert Kiyosaki, “The investor is the asset or liability, not the investment.”
Understanding yourself first will lead to success in the long run.
PRINCIPLE 9: CONSISTENCY
Have you ever changed your mind on how to put a strategy into action? When you make modifications on a daily basis, you end up catching nothing but wind.
Stock market swings have more variables than can be calculated mathematically. We can be confident that someone successful has stacked the odds in our favor by following a tried-and-true technique. Before modifying anything, evaluate both winning and losing trades to see if the entry, management, and exit matched every condition in the strategy and if you followed it correctly.
A final note
I hope that these basic principles that have guided my ship through the worst seas and into the best harvests of my life will also guide you. Feel free to submit feedback in the comment area below.