"Meticulous Planning Will enable everything a man does to appear spontaneous."

Mark Caine

It's Your Money. Shouldn't It Be Your Plan?


Trading has end goals that are different for everyone.  Some look at it as a way to keep score, others as a way to prove ego, and others still as a means to an end.

Regardless of the goal, everyone has a goal to make profits.  The thing about a goal like that however, is because it’s so open ended, most people never get the big profits they really wanted in the first place.

It’s easy to say I bought FB at $20.  It’s a lot harder to say I’m still in FB from $20 when it’s now over $170.

How do you handle the swings that come with holding a trade for bigger profits?  Whether it’s taking a trade from 1:1 to 2:1 or taking a trade from a double to a triple, to make real profits, you have to be willing to give it back without willing to go underwater on a massive winner.

The key to making larger profits is you must learn how to only trade house money.

It’s easy to say I’m in at $20 and my stops at $25 so since the stock is currently at $30 I’m home free.

However, if tomorrow the stock comes out with news that sends your stock gapping 50% premarket (EFX anyone?) and you aren’t covered then that stop does you no good.

A stop market order only means that you will be taken out at the market price if your number is reached.  A stop market order does not guarantee you will be taken out where you want.


A stop market order does not guarantee you will be taken out where you want.

So back to our example.  If you are in a stock at $20 and it’s up to $30 you’re up around 33% at the minimum.  

If you’re stop is moved to $25 you’ve locked in a $5 gain and are up at least 20%; excellent job.

However, if the next day something happens that causes the stock to gap around and take a 50% bath, what will your stop end up doing?

Your stop market will simply trigger at market price once $25 or lower is reached.  That means if the market opens at $15, you’re out at $15.  

This doesn’t happen very often under normal circumstances, but if you’re in profits and holding a stock through earnings, FDA news, or just unlucky, you better believe it can happen.

Stop Markets are helpful, and they are used by us regularly especially starting out.  The potential for these types of black swan events are rare and if you truly understand trading it’s simply exchanging risk for potential reward.  Which is why a trader clicking a mouse for 30 minutes can make more than most who work 40 hours when it’s done right.  

That being said however, once the trade gets enough into profit to start using house money, there are alternatives that work even better than stop markets.  Enter Box Trades.

Once the trade gets enough profit to use house money; there are alternatives better than stop markets.

Box Trades using Options

A box trade requires 3 parts.

  1. Equity Shares
  2. Call Options
  3. Put Options

While it can be done from the start, it is recommended to not pursue until the trade is in enough profit to cover the cost.  Doing this beforehand will eat away at profits and is only recommended under extreme circumstances.

However, lets go back to our example above.  (Note: The video below shows a live example if you’d prefer video over reading).  In the above example, the stock was purchased for $20 and was currently at $30.

If the same goal of $25 stop was desired, instead of using a stop market which has risks, the trader could look to purchase $25 puts roughly 1-3 months out on a long term setup or 2-4 weeks out on a short term setup.

Whatever the cost of the put, the trader would sell calls on the other end to offset the balance.

Tip: Never sell naked calls/puts. Only sell 1 contract for every 100 shares you own and round down.


Let’s say the $34 calls cost the same as the $25 puts.  Noticing the calls are more expensive than the puts from the get go may be an excellent indicator where markets believe this stock to be heading.

In this example let’s assume the trader has 300 shares purchased at $20.

They want their stop to be at $25 to lock in profit now that the trade has reached $30.

By selling $34 calls and using the profits to buy $25 puts they have created a risk free box.

If the trade gets above $34 before expiration, the shares are taken away for a $14 profit or 70% Return.  

If, however, the trade has a black swan event where the stock gaps against, the stop market order would result in a net loss regardless of where the stock was the day before.

The puts however would profit anything under $25 theoretically locking in profits at a $25 level or $5 per trade.

The difference between a covered call and a box trade is a covered call is used for slow stocks looking to collect extra premium, the box trade is used for aggressive stocks where you are looking for insurance.

The downside to this is that if the stock gets past $34 you’re out the shares and no longer have a position.  If, however, you are doing this short term and the options expire worthless you can look to put it back on every few weeks or months and simply hold until taken out from the calls.

This is only one example of how to protect profits, but hopefully it can help shed some light on ways to protect profits other than simply adjusting a stop and hoping the news doesn’t hurt you.

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Why Shorting with your Head can take away your Balls

EFX or Equifax made national headlines when it disclosed it’s massive data breach.  Everybody was reading about the failure of this company on a massive scale.  This seemed like a goldmine in the making.  

EFX takes 5 days to fully digest the news and the shorts but it pays off in spades going from the mid $120s down to just under $90.  Not a bad payout for the bears over a 5 day stretch.

Everybody that missed the first run down was eager for round 2.  Price runs up, and they start lickin their chops.  They’ve got the fib levels in play, they know the headlines are all bad, they like the round numbers, and they start hitting it short.

Price might be making new 20 range highs on the 30 and 60 minute, but this trade is a disaster.  This company is the next Enron, their entire businss core has been shifted.  Traders make compelling statements to themselves and talk themselves into getting larger, doubling down, and doing everything they shouldn’t have done because this company has done something so bad it has no choice but to drop.

No Matter How Bad the News is; the Market can always price in what it wants to. Nothing ever HAS to happen.

These traders took logic, and used it to get into a trade that was turning to the upside.

Long term this trade definitely has more going against it than for it, but will the trader that went all-in at $100 because it was a 10% correction from the lows and that psychological number was huge, will that trader be around to take another shot at it?

By using their heads, traders out there got themselves burned so badly that they won’t have the balls to pull the trigger next time.  The worst thing a trader can do is be right but so early that they take themselves out of the game before it even starts.

When building a case for the bears, few companies seem as out in the open and flawed as EFX right now.  Remember what happened to CMG after they were found to make people sick?  Their stock lost over 50% over the course of a year.

Logically, EFX definitely has potential to follow suit.  But does that mean it will?  If there’s no one left to buy, a stock can roll over.  If there’s no one left to short, a stock can explode.

Start building yourself a case for entry.  Doing this properly can help you determine between what makes sense in your mind (logic) and what can produce profits in your account (edge).  Because if you don’t, you’re going to hurt yourself mentally until you lose the nerve to take the trade that should be taken.  

Building a case for entry in trading is the difference between logic and edge. Only one Succeeds.

If you were to build a case short on EFX, what timeframe would you be looking at? 

Let’s assume for this example you like the 30 minute as it’s a 1-5 day hold using this timeframe on average.

What would your answer be to these questions?

  1.  What are the moving averages telling me about this stock?
  2.  What is the 20 range high/low telling me about this stock?
  3. Where is the last area that price respected strongly?
  4. Where did the last breakout/breakdown come from?
  5. What is my primary reason for taking this trade?

Now look at EFX since it broke out to a new 20 range high on the 30 minute and decide what would your decision been?

Can you be opposite in the short term when the long term says something else?

Can you be patient enough to wait for the proper signal?

Do you have a signal at all that should get you in?

These are the questions you have to start asking yourself in trading.  Regardless of the stock, trading is a personal process.  There are always traders looking at the opposite side of your trade, whether retail or professional.

There are always trades you can do everything right on, have your edge present, and still come out losing.  So you better make sure that you are 100% convicted on the trades you DO take.  

Yes, EFX made sense to short it.  Yes, EFX went long in the short term and is easy to call out in hindsight.  But, now that you see a potential case for entry and have an idea on some questions to start asking, what do you see going forward?

This video may help show the way as well, but remember, every trade is a winner and a loser depending on who you are.  The trick is to keep your head in check so you don’t lose your balls, because if you don’t have the guts to pull the trigger when it counts because last time you got burned, you’re done.  Build the Edge, Follow the Edge, get Paid by the Edge.  It really can be this simple. 

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