Rule #1 of trading

Always make money when you’re right.

You know the story….XYZ is trading at 14.45 and you’re SURE it’s going to 20 bucks.  So, what do you do?  Naturally, you lever your buying power to the max, go “all in” on XYZ and then….

Flip out when it hits 14.22, realize the mistake you’ve made and sell all of your shares for a .23 loss, or about 4-5% of your account value because of the leverage.

Then, of course, the stock moves swiftly to 20.00 over the next month.

This CANNOT happen if you’re going to be a good trader.  You MUST MAKE MONEY when you’re right.

There are a few ways to help yourself do this:

Clearly define the point at which you are wrong. This doesn’t have to be a price level, it can also be a time limit, etc.  “If it’s not over 16.00 by next Thursday, I’m wrong”.  “If it hits 12.21, I’m wrong.”   Now that you know what it means to be wrong, you can take a position that lets you be comfortable with the loss that will occur at that point….and STOP YOURSELF from exiting before this “wrong point” comes true.  REMEMBER–until the market proves you wrong, YOU ARE STILL RIGHT!

Trade option spreads. Verticals, Iron Condors, etc….these all have clearly defined, limited risk.  For example, on this trade that I shared on mytrade, I know that if I’m wrong and SPY rallies, the worst that can happen is that I lose $5025.  So if SPY jumps 3 points tomorrow, I won’t flip out….my risk is defined and I’m committed to holding through expiration no matter what….now it’s up to the market to determine if I’m right or wrong.  NO EMOTION, no reaction.

Those of you who know me know that I prefer the option spreads method.  If you’re not comfortable with that yet, just hit mytrade, search “vertical” or “iron condor” and copy the trades into your thinkorswim account.  Try a few 1 lots that you agree with and you’ll see the liberation that comes from defined-risk trading that forces the market to prove you wrong in order to lose.

p.s.  In that spread above…. even if the market goes up a little bit (in other words, I’m wrong), I’ll still make money.  In other words:  Through option spreads, I even make money when I’m slightly wrong. Now that’s a breath of fresh air!