When a position results in a loss just after buying, most likely the trade was a mistake. It may mean missing an element in selection norms, or the timing could be wrong.
Many investors understand that they should cut losses to control risk. Yet they persuade themselves to wait. Trading is difficult enough without undermining one’s own rules.
Being disciplined means taking lots of small losses to keep safe. Mark admits that his performance went from average to outstanding when he made up his mind and decided to never have a “just this one-time” moment ever again. He decided not to break the rules because it doesn't pay.
Paul Tudor Jones has a message over his trading desk: “Losers average losers.” Those three words comprise impactful intelligence that only losers average down on losing positions. That message knocked the author for a set of reasons. First, if a wizard-like Paul Tudor Jones makes that statement, then it’s worth paying attention. Second, if one of the greatest traders was compelled to post such a sign, it is evident how alluring it is to “average down,” and how important it is to remind yourself not to do it.
A stealthy probability of the 50/80 rule is very important to compound money and not losses. Once a stock establishes a major top, there’s a 50% chance that it will fall by 80% and 80% chance that it will fall by 50%.
This is a warning about being aware of the first loss to hit the radar. Every major reduction starts as a minor retreat. If a person is disciplined to notice trading rules, he will limit his losses while they’re small.
Professionals are consistent and bet only when the odds are in their favour. They avoid risking money on low probability trades.
Buying a stock that is suddenly cheaper can be a trap instead of being a good bargain. When a trader buys a so-called cheap stock and it moves against him, it is difficult to sell because it becomes even cheaper. Then it becomes more attractive based on the cheap rationale.
When a leading stock tops, it may look inexpensive after a decline, but it’s expensive. This is because stocks discount the future. Usually, after the decline, the P/E ratio rises because of negative earnings comparisons or losses showing up on the balance sheet. However, it's too late by then. People are not willing to buy such stocks irrespective of how high quality they are, making them just worthless pieces of paper.
One must strictly stay away from stocks whose price action does not confirm the fundamentals.
A series of small successes bound together over time result in big success. Mark too initiates with a considerably small position. If it works, he adds more positions or more stocks. If he succeeds in a few trades, then he prefers to go aggressive and increases the overall exposure of his portfolio. This process keeps him out of trouble and helps to win big when right. Trading smaller while trading the worst is controlling risk.
The goal in trading should be to execute a strategy one can consistently rely on, realizing that the result of a single trade does not define success; rather, it’s the combined outcome of all the decisions and trades over time.
Mark shares his general trading rule. He never allows any stock to go into the loss column if it has risen to a multiple of his stop loss and is above his average gain. When the price of a stock he owns rises by three times his risk, he moves up his stop. If the stock rises to twice his average gain, he moves the stop to breakeven or equal to his average gain. This protects from losses and also safeguards confidence and profits.
To attain consistent profitability, one must protect his profits and his principal. There is no difference between the two. Once a trader makes profit, that money belongs to him. Yesterday’s earnings are part of today’s capital. Novice investors treat their income as the market’s money instead of theirs, and in scheduled time the market takes it back.
The marketplace is full of publicity and exaggeration. To trade successfully, one must know how to make his own decisions. A trader’s best and most robust protection is to have a strategy and rules that direct his actions.
If he wants invariant success, he must apply discipline unfailingly. He can’t have one without the other.
Did you like this unit?
21 0
FAQs
When a position results in a loss just after buying, most likely the trade was a mistake. It may mean missing an element in selection norms, or the timing could be wrong.
What is the 357 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the miracle of compound interest? ›
Compounding is the process whereby interest is credited to an existing principal amount as well as to interest already paid. Compounding thus can be construed as interest on interest—the effect of which is to magnify returns to interest over time, the so-called “miracle of compounding.”
How do I compound my money? ›
Compounding is a powerful investing concept that involves earning returns on both your original investment and on returns you received previously. For compounding to work, you need to reinvest your returns back into your account.
What is the 80% rule in trading? ›
The 80% Rule is a Market Profile concept and strategy. If the market opens (or moves outside of the value area ) and then moves back into the value area for two consecutive 30-min-bars, then the 80% rule states that there is a high probability of completely filling the value area.
What is 90% rule in trading? ›
Understanding the Rule of 90
According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
How does the 80 20 rule work with money? ›
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.
What is the 50 rule in trading? ›
The fifty percent principle is a rule of thumb that anticipates the size of a technical correction. The fifty percent principle states that when a stock or other asset begins to fall after a period of rapid gains, it will lose at least 50% of its most recent gains before the price begins advancing again.
What did Warren Buffett say about compound interest? ›
He famously said, “If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes.” This aligns perfectly with the principle of compound interest, where the focus is on long-term growth rather than short-term gains.
What did Ben Franklin say about compound interest? ›
Benjamin Franklin said it best, "Money makes money. And the money that money makes, makes money." Plan ahead and learn to use compound interest and the Rule of 72 to your financial benefit. Time is compound interest's best friend.
While stocks are a good investment to compound growth, dividend stocks may be even better. Dividend stocks are a one-two punch, as the underlying asset can keep increasing in value while paying out dividends, and this investment can earn compound growth if the payouts are reinvested.
What is the 8 4 3 rule of compounding? ›
Summary. Learn about the 8-4-3 rule of compounding, where investments double within 8, 4, and 3 years, showcasing exponential growth. It emphasizes staying dedicated to investment plans, guarding against inflation, and adapting to market changes.
How much is $1000 worth at the end of 2 years if the interest rate of 6% is compounded daily? ›
Hence, if a two-year savings account containing $1,000 pays a 6% interest rate compounded daily, it will grow to $1,127.49 at the end of two years.
What is the 3-5-7 rule in day trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
What is the 3 30 rule in trading? ›
The 3-30 rule in the stock market suggests that a stock's price tends to move in cycles, with the first 3 days after a major event often showing the most significant price change. Then, there's usually a period of around 30 days where the stock's price stabilizes or corrects before potentially starting a new cycle.
What is the 60 40 rule in trading? ›
While short-term capital gains from stocks or ETFs are taxed at your ordinary income tax rate, futures are taxed using the 60/40 rule: 60% are taxed at the long-term capital gains tax rate of 15%, while only 40% of your short-term capital gains are taxed at your ordinary income tax rate.
What is the 90 120 rule in trading? ›
For example, if you're 30 years old, subtracting your age from 120 gives you 90. Therefore, you would invest 90% of your retirement money in stocks and 10% into more consistent financial instruments. This rule creates a portfolio that gradually carries less risk.
