Best Practices - Let's share what works

[dmk112]

All-

I wanted to start a thread that we can gather any best practices that have worked for any of us. In order for this to work everyone needs to share 1 best practice that they may have discovered (or picked up somewhere) that has been helpful and improved their trading.

I'll start off with one...

It is in regard to risk control - I've picked this up from multiple sources and and books and it really helps control the swings and draw downs of your account.

There are two rules: (1) You cannot risk more than 2% of your account size on any trade. For example, if your account is $10,000 then you cannot risk more than $200 on any trade. That is if you bought a 100 shares of a $20 stock, your stop can be no lower than $18. This rule is flexible in that you are not boxed into a set % on a stop (like O'neil does with his canslim). This is important since different stocks have different volatility. Instead of setting a stop at 7 or 8 % below your purchase price, you let the account size and position size determine the stop. If I'm trading a $3 stock I may put in a stop 15% below purchase price so the stop is at $2.55. Now to do this, if I have a $10k account I cannot risk more than $200 so my position cannot be more than 444 shares ($200/$0.45). (2) You cannot lose more than 6% of your account size in a single month. This will limit the amount of exposure you have to the market at a single time and if you go above the 6% you stop trading. For example, if you use the previous example and as a result you can only risk $600 in a single month which means you can have 3 positions open at once if they are risking $200 each. If you reduce your position size you can use 6,etc... If one of the trades stop out and the others are flat, I cannot take on another position. If I make a profit of $400 on one trade and sell out, I can now take on two additional trades, and so on. This rule is especially good for choppy markets that will "bench" you for the rest of the month until you can re-evaluate the markets. If I hit the $600 limit in a month, I stop trading...

Now your turn...

[steelman]

2 Rules

Thanks Dmk. I read the same 2% rule. I also was told in a workshop that if the starting account is under $5000, then a person would have to be a little more aggressive. T


Here are 2 rules that Warren Buffett said.

Rule #1 Don't lose money
Rule #2 See rule #1

[dmk112]

Here are 2 rules that Warren Buffett said.

Rule #1 Don't lose money
Rule #2 See rule #1

...and buy low and sell high. heh.

[IIC]

...and buy low and sell high. heh.

Generally...I say "Buy High and Sell Higher"...Doug

[dmk112]

Generally...I say "Buy High and Sell Higher"...Doug

Doug - I'm sure you have more to add than that! You've been trading for a long time, anything you would like to share? I know you just posted something over at DT'ding thread but if you got some other stuff fire it off... !!!

[IIC]

Doug - I'm sure you have more to add than that! You've been trading for a long time, anything you would like to share? I know you just posted something over at DT'ding thread but if you got some other stuff fire it off... !!!

Of course I have more to say...Don't know how helpful it might be to most...But I'll post over the weekend...Best, Doug

[IIC]

Here's a few things that I try to do:

1) I don't set $ goals per day, week, month...because a lot has to do with what the market is doing...Some days there just isn't much there. Unless conditions are right and I find stocks that meet my criteria I'd prefer not to trade...Nothing worse than trading just to trade or making up a trade in my own mind.

2) Sell when my criteria or conditions tell me to sell...HOPE is a 4 letter word. Every time I make a mental error I don't need to go back and study to figure out where I made a mistake...I know almost immediately that I just made a mistake and what it was.

3) Never worry about a stock that you just sold that turns around and rockets...It's over...It's done...There has been a running joke on the Net for years..."Just buy what I sell"...Well, it may be true that a number of them take off...But it seems that not very many people except me remember the ones I sold that subsequently tanked. This is especially true when my trade intention is a scalp which I intend to sell as soon as one of my main indicators start to turn...After the sale I don't care if it turns around and rockets.

4) This one I got from Spike years ago...When you screw up a trade but you still make money...Don't think you are all that and that you can beat the market...Don't give the profits back but don't be satisfied w/ your performance and think you can do it again.

5) Have a big loss?...Don't try to press and get it back all at once...Chances are you'll take undue risk and maybe get yourself into a deeper hole. For example, a few weeks ago on a Wednesday I blew it...Had a really bad day. I resigned myself to having a losing week. On Thursday I started slow and figured over the next 2 days I'd try to stick to my plan and get as much of it back as possible...Well, ends up I got it all back and a little more on Thursday...Friday was fairly good too. Finally, if you are just too upset by a big loss to think straight or you are having a bad streak...I recommend going to cash and taking some time off...A day, A week, A month...However long it takes until you feel confident again....I remember back in 2001 I was having a nice year and I let the whole thing get away from me...Belive it was July or August...I ended up taking over 3 months off altho I still watched the action.

6) Don't buy a stock just because someone else recommends or buys it...You may consider what some say but take that stock and determine whether or not it meets your personal criteria....Seen it too many times...One person buys a stock and makes money...The next person follows them and ends up losing money.

Just a few ideas I have...Doug
"Trade What's happening...Not What 'Ya Think Is Gonna Happen"

[dmk112]

Doug - great post!!

[jiesen]

Doug - great post!!

Yes, great advice from one of the best!

Thanks for the tips, Doug... these are absolutely words to trade by.

[wooish]

Here are a few rules that I live by but I think some of you may not agree. I've lost $$$ in the past violating those rules


1. I don't set goals
2. I don't chase stocks (depending on conditions, I usually don't buy stocks that already has 3+ up days)
3. I try to take loss when the trade doesn't go my way but I've recently violated this rule and lost quite a bit <-- I really need to work on obeying this rule.
4. I only buy stocks on a down day
5. I rarely set stop loss on the stocks I buy, but after I bought the stocks, I move up my stop to profit my profit.

[skiracer]

Here are a few rules that I live by but I think some of you may not agree. I've lost $$$ in the past violating those rules


1. I don't set goals
2. I don't chase stocks (depending on conditions, I usually don't buy stocks that already has 3+ up days)
3. I try to take loss when the trade doesn't go my way but I've recently violated this rule and lost quite a bit <-- I really need to work on obeying this rule.
4. I only buy stocks on a down day
5. I rarely set stop loss on the stocks I buy, but after I bought the stocks, I move up my stop to profit my profit.

[B]Wooish,
there are several items on your list that could be prohibiting you from being the trader you could be and you seem to be a good one going by your picks in the contest and how well you are doing in it.

1. Setting goals is perhaps one of the most important components of a good trading discipline or better yet trading plan. finding the right stocks is the first thing and developing a plan that includes and entry point, stop loss points, and a definable exit strategy are the key ingredients. changing that exit point or strategy may change thru the course of the trade but knowing what you are looking for in a predetermined exit point is what makes Ernie so successful. his mind is made up and is set on a predetermined goal. every successful decent trader i know follows these rules. sometimes they may have to be edited but under normal conditions following your plan is the key to success.
2. since i rely strictly on a stocks chart pattern and how much any recent uptrend has left room for profitaking under my entry point i dont look at how many days up in a row or in a week or two but strictly at the chart and what it is telling me with its pattern and the indicators i use.
3. shame on you. i would be embarrassed to mention that. the cardinal rule of trading is to not violate your stops. it places your whole plan on hope and wishing for something to come true.
4. limiting yourself in any capacity only takes away from your plan and strategies. i very seldom buck the current trend of the market. like spitting in the wind it only blows back in your face. like honoring your stops realizing and following market trend is one of the key elements in successful trading. i also never tell myself that i am smarter than the markets themselves. they seldom realize what they want to do with so many extraneous factors influencing their movement. i like to let the markets show me which way the wind is going to blow.
5. limiting losses are key. you will last longer by exiting any trade that goes past what your math expectancy numbers call for in your discipline or strategic plan. how or when you set them can be significant but using them is the key to limiting losses.

I have been stating this forever here and on other forums and chats. make a plan consisting of entry, stops, and exit points and stick to that plan. become disciplined which takes emotional control. most of you are never going to reach that level of control but if you dont start with the realization that this is what it is going to take to be successful then you are going to flounder around in confusion and indecision for a long time before you go broke and even then you will still be wondering why when the answer is right in front of your eyes.B]

[billyjoe]

Dmk,
-------1. Don't rely on anyone (not even your mother) who tells you a rumor or story that such and such a stock will be good because of a certain event about to happen. If it really is going to happen thousands have found out before you and the price is already overextended.

--------2. Your best trades especially in a short term situation wil start out good and get better, you might want to add to your position as your buy is showing early success.

---------3. The longer your stock doesn't perform as you planned the less chance that it will turn around. It's dead money. Get rid of it. There's hundreds of better prospects.

---------4. Many advisors say to invest according to your age. At 60, make 60% of your investments safe, conservative, dividend payers. At 70, 70% and so on.

---------5. Always keep it interesting by playing with a % to keep the American dream alive. Probably no more than 20%. Experiment with future blockbusters and innovators but don't put all your eggs in one speculative basket. Odds are you'll drop it if you do.

---------6. You know that sickening feeling when you've screwed up a trade. Sell it and move on. Don't become a bitter ex and broken trader.

---------7. Keep working on your trading technique. It soon will become clear what works and what doesn't. Some of the greatest successes come from miserable failures that you will never repeat.

-----------billy

[skiracer]

[B]i think the very best that you can do for yourself is to develope specific factors that you know will work the higher percentage of times in selecting your trading setups and trades in general. whether it be the way the fundamentals line up or the technical aspects of the chart or some combination of both. finding and picking the right stocks is the first item. but there has to be a method.

realizing which way the market is trending is next. understanding that going short when the markets are in a definite uptrend is foolish and visa versa. knowing to stay out at certain times will never hurt you and you will not lose money during that time frame.

develope a discipline. this entails relying on specific factors and your performing in a distinct way during the trade. /B]

control those emotions. the more times you honor your stops and walk away with a minimim loss the easier it will become until it becomes second nature. the more times you exit at a minimum loss and then re-enter later for a big gain it will become second nature for you to do that. each time you perform according to your discipline the easier it will get to do just that everytime. once the realization hits that you can be and are in control of the trade the easier it becomes and the closer you come to being successful at trading.

and the most important factor of all. throw hope out the window. if you want to gamble go to vegas or AC and bet on the red or black. the odds will be much greater in your favor and you will last longer.

[wooish]

Ski

Thanks for the advice and I can see you put alot of thought into it. I'm not a professional trader or even qualify as a trader because I have a full time job. I've became so busy that I hardly can follow the market now. But you know what I do wish to become a full time trader some day so I'm developing my skill slowly.

Anyway, I have to admit it's a shame that I've violated my own rule and took some loss but I hope you all learn from it. I definately see you as a good trader with good discipline and I do look upon you for stock and market analysis. I'm really glad that I'm part of this forum because there are quite a few of good traders that I can learn from. Please keep this great thread going.

[peanuts]

here's a trick

I forget when I learned this trick, but it is not of my own imagination:

Must have conditions:
- General bull market
- Positive day for the major indices
- Stock which trades minimum $10 million total avg. daily volume
- Stock which is up at least 5% and is making a 3 month high in price

Trade:
- buy within the last 1/2 hour if stock is strong all day and is within the top 20% of the movement made in the stock during the day (ex: prev. close was 20, today's move is to $22, only buy if stock is at $21.60 or higher within the last 1/2 hour)
- sell within the first 1 1/2 hour of the next trading day... typically gets an overnight 2% or 3%

This tactic does not work in bear markets or with stock that are not making 3 month highs.

I made this trade with BW yesterday and I'm out this morning. Paid $26, sold $26.60