How do you make time to trade and invest? After all you may want to toe dip to see how much time you should devote. Many people cannot and do not want to spend all day in front of the screen. So when mentoring I help them with this issue. After all it is about not just financial freedom but also personal freedom.
I explain to them that trading is simple, it’s just people don’t know the simple things they should do. People wrongly think trading is about just buying the right thing. But what you cannot be 100 percent right all the time? And for how long do you buy it? Simple questions people don’t know how to answer and so lose money.
To save time, energy and money, you can therefore simply buy, and place orders with the online broker to sell if the price hits a certain profit (take profit) or a certain loss (stop loss). Wrong. Where do you place them? And why are you cutting profits by having these orders, and why are you taking losses?
Again, people think they are advanced when they’ve done this. They are still not doing it right.
You place a stop loss because professionals know from experience that without one you blow up eventually – may be one trade in 30 costs you all your 29 other winners – but it happens.
But what about take profit (limit orders) – surely you should let profits run. You can. The simplest way is to have a trailing stop that moves up with the price. But then the question is how far away this is? So you see by asking simple questions it starts looking complicated.
Bear with me, it’s not complicated. Your stop loss should be far enough away so not to be hit by normal price moves. And it should be such that it is not more far away than the reward, profit, you will likely achieve.
And what about how much to bet? Well that should be so that if your stop loss is hit, you do not lose more than 1% of your total risk capital. Professionals do it this way.
Okay, but what about knowing when to place these orders? When is the trade in your favour, when is there momentum?
Well people look for price trends, they look for price ‘breakouts’, they look for stories in the press, all sorts of things to support the view.
There is nothing stopping you placing a stop loss at night (trailing) and going to bed. So why doesn’t everyone make money in their sleep?
They do not bet the right amount. They lose too much when they are not one hundred percent correct. They do not place a stop loss. They do not make it trailing, so that all their profits vanish. They put it too close to their opening position. They do not enter when the price momentum is in their favour – it may not be at the time they go to bed, they can always place the entry order at a level that if the price hits and they enter the market, that would show the momentum must be in their favour eg a recent high level in the price.
But you know how we hedge fund and professional managers do it really well? We add to positions when they are in profit. We repeat this whole cycle.
Alpesh Patel
