Profits

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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Max Losses & How to Handle Them with an Edge

First we took the Loss.

We took a Max Loss on 8-8-17.  If you don’t know how to handle a loss, you can look to hold on longer than you should and make it even worse.  There’s a reason you plan for max losses, so that when they occur, you can take it like a pro.

Next, we stuck with the Plan.

That allowed us to take the trades the day presented instead of being distracted by yesterday’s losses.  Once all of our trades were live, we walked away.  We went to the gym, we studied other charts.  There’s no advantage to sitting at the desk and staring, your results are the same, your mental psyche is drained if you sit and stare.  There’s a better way.

Finally, We made it all back and then some.

This is how you trade like a pro.  Focus on the setups, focus on the system.  The results WILL take care of themselves over the long haul.

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Why You Must Focus on Rs and Not the Dollar Amount

If you’ve ever YouTube’d Day Trading one of the first things you see are videos of things like watch me make $5,000 in one hour or learn how I make $200 a day trading or any other nonsense that is only there to sell you.

The truth is, without knowing how much they were risking to make that, you don’t have all the facts and cannot POSSIBLY consider their strategy legitimate for anything more than selling purposes.

When looking at any trade result, any strategy, or any plan, the secret to success is all in the R.

R or Risk Factor is how much you’re willing to risk per trade.  Typically, the logic goes that you should not risk more than 2% or less per trade.  Many times you’ll hear this in swing trading but not as often in day trading as even that amount can be substantial.

Regardless of what the amount is, the key is understanding why it matters.

If a “guru” risks $1,000 and makes $1,000 and posts a video of it online, it’s impressive to an extent but it’s no different than someone risking $10 to make $10.  They just had a larger account to begin with.

However, if the same guru posts a video that shows $1,039 day come see how at my site” then you’ve been hooked into believing you can start making $1,000 days yourself if you just follow along.

The truth is your dollar amount return is completely dependent on your account size.  If you are only supposed to risk 2% per trade then to risk $1,000 you must be trading a $50,000 account.

This isn’t that large a number in the grand scheme of things, but when you’re struggling to come up with the $500 to pay this “guru” to show you how to make $1,000 a day, be very aware of how much it costs to copy him in all aspects; not just the profit part.

Another important reason of R value is for data comparison and trade management.  At the end of the day if you pull in $300 it is a nice day.  If you have a monetary daily goal as your main focus point (not recommended) and you reach it; then you exit all and call it.) 

But if you want to double that monetary goal, what do you have to do?  Hold twice as long?  Risk twice as much?  By tracking Rs instead of $ amounts, you can quickly see which management style produces the best Rs over the long haul and then simply make the Rs match the goals instead of trying to make the money match the goals.

If you want to make $5,000 a month, you can risk $1,000 a trade and hit it with 5 trades or you can risk $500 a trade and make it with 10R.  They do the same thing but they handle themselves entirely different.

One final point; ever wonder why casinos make you trade in your cash for chips?  Because you can handle yourself better with chips.  If you are carrying around 20s and 100s and playing with them, the money is too real, you’ll play differently.  Trading should be the same, by focusing on Rs and not the $s, you can trade the right way and hit targets whether you’re trading $25 an R this month or $200 an R next month.

Let the Rs show success; stop chasing the $$$.

If you need more help with this, we offer plenty of free training through our blog and email group or we offer a premium service with custom built management and tracking if need be.

Why Your Plan Needs a Stop

There are alot of traders who don’t use stops in their plan.  They do this for reasons like “The Algos are out to get me” or I lose too much with a stop” which is really just an excuse for the traders limitations.

When you give excuses for your limitations; you get to keep them.

This can be seen at the highest level all the way to the brand new trader.  Those that don’t plan for stops will be taken out of the game.  Look at Jesse Livermore.  Arguably the most famous trader in history, the book “Reminiscence of a Stock Operator” is a classic and one of the first books traders read when they get into this game.

Yet what the book doesn’t mention is after he made close to a billion dollars in one day by today’s standards, he could not be satisfied with small profits going forward.  He kept risking more and more without any stop, and within 5 years of having a billion dollar day he lost everything for the 3rd time in his life and could not handle it.  He took his own life in a bathroom.

For a more modern take, consider some of today’s hedge funds.  Assets so large they have no stops in place to wind down positions.  Look at the final exit price of VRX for a certain well known manager compared to his entry price and you’ll see just how important the stop truly is.

Who doesn’t use a stop successfully?  Warren Buffett.

Who does use a stop?  O’Neil and traders/investors like them.  It simply comes down to this.  

If you are buying something you plan on giving to your kids for the dividends, then wait for a market extreme mispricing and buy all you can without a stop.  When buffett goes in, he rarely catches the bottom.  Look at how long his bank plays took to get extremely profitable in 08-09 era.  If you’re doing this type of strategy, divide your amount into 3-12 lots and buy it monthly or quarterly and never look back.

If you aren’t investing to give to your kids or retirement, strongly consider stops.  Whether they are % based like an arbitrary 7% or ATR based off the pivot high/low, it doesn’t matter.  You need to have a stop.  

Stop making excuses and start tracking the data.  You’ll see there’s a few times you’re being stop hunted but are you basing the stop off the proper level?  Because a true breakout does not pull back 7%.  A true pullback continuation holds near that pivot low.  

First, analyze your losses and see how close your stop was to the actual level.  We have ways of tracking all of that data in the premium services section if you need help.

If you already know your numbers, then you know the truth.  90% of the stop hunts are coming from the fact you’re trying to get as large as possible with as tight a possible stop as you can get when the proper stop would still have you in the trade.

Longevity; Not Prosperity.  Focusing on the first will give you the second.  Focusing on the second will take the first away.