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Trading: Thoughts from the trenches

Some ideas about trading. Trading stocks and other assets such as futures, is different than investing. Trading has a very short-term outlook. But these ideas can also benefit the investor, who looks at long-term wealth-building for retirement and other purposes. It's OK to be both, but my suggestion is to only "trade" about 10 percent of your total portfolio. 
  • Trading should be boring, like factory work. If there is one guarantee in trading, it is that "thrill seekers" get their accounts ground into parking meter money. 
  • Amateur traders turn into professional traders when they stop looking for the "next great technical indicator" and start controlling their risk on each trade.
  • If you focus on the money, you will start to impose your will upon the market in order to meet your financial needs. There is only one outcome to this scenario: you will hand over all of your money to traders who are focused on protecting their risk and letting their winners run. 
  • The best way to minimize risk is to not trade. This is especially true during the low-volume -chop and slop- found during the afternoon trading session between 11:30 AM Eastern and 2:30 PM Eastern. If your stocks are not acting right, then don't trade them. Just sit and watch them and try to learn something. By doing this you are being proactive in reducing your risk and protecting your capital. 
  • There is no need to trade 5 days per week. Trade 4 days per week and you will be sharper during the actual time you are trading. 
  • Refuse to damage your capital. This means sticking to your stops and sometimes staying out of the market.
  • You should never let one position go against you by more than 2% of your account equity. This means if you have a $50,000 trading account, you should never let one stock turn into a loss of more than $1,000. This means if you max out your 2 to 1 margin account and buy 2000 shares of a $50 stock, you must have a stop loss of 50 cents. That is tight and bound to get hit. Do yourself a favor and buy 400 shares of this $50 stock and use a $2.00 stop to start. That is only an $800 dollar loss and gives you room to trail your stop up to break-even before you are taken out on a wiggle. Is there ever a time when it is okay to take more than a 2% portfolio loss on a position? NO! Never means exactly that. This is a maximum loss by the way. Setting up your plays for losses of 1% of your equity is even better.
  • Use daily charts to get an idea of the 30-day trend, hourly charts to get an idea of the 1-day trend, and 5-minute charts to establish your entry points.
  • Adrenaline is a sign that your ego and your emotions have reached a point where they are clouding your judgment. Realize this and immediately tighten your stop considerably to preserve profits or exit your position. 
  • Look for opportunities NOT to trade. 
  • You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point which is typically where you will set your stop when you buy a breakout. (In case you ever wondered why you get stopped out on a lot of failed breakouts).
Provided to me by an instructor at the Online Trading Academy.

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