Approach Every Trade Risk-First

Beginning with the first two rules: always go in with a plan and approach every trade risk-first. The two most important words in trading are respect risk. Risk cannot be completely averted, but it can be minimized. If a trader wants to mitigate risk effectively, he must realize that stocks don’t regulate themselves. He is the regulator and has to protect his hard-earned capital. Laziness, lack of discipline will lead to poor performance. 

With every trade Mark executes, his approach is always “risk-first.” By following this approach, he can easily evaluate what he stands to lose if he is wrong, which is much more important than what he stands to gain if he is right. This is because the game is over if he loses all his chips.

When a trade doesn’t work out as expected, he is sure of the exact price where he wants to exit. He predefined this exit level. Instead of focussing on the upside, he focuses on the downside. Whenever his stop loss is triggered, he gets out of the trade without any question. 

Without discipline, rules are meaningless. One must learn to accept small losses thus protecting them from turning into large losses. 

Many investors tend to use emotional stops that are incorrect and far beyond the mathematical stop. This results in a loss that is damaging enough financially and psychologically.

Beginners tend to fluctuate between being a trader and an investor according to their convenience.

When they are correct, they choose to be a trader and when they are wrong, they choose to be an investor. 

Losses should be cut off immediately, without any hesitation.

Losses should be kept to 10% or less. This is because, with a 10% loss, it takes an 11% gain to get even.

Stock trading needs a good plan based on solid trading principles. Sacrificing very risky trades are part of that plan. 

How to place the optimal Stop Loss? 

To control his risk, Mark tries to enter a long trade as close to his stop loss as possible. This is known as trading near the “danger point”. Placing optimal stop loss is setting it at a level that will provide enough room for normal fluctuation, but is close enough to the danger point that’s not very risky mathematically.

In trading, there are only a few things over which one has control. There are three decisions one can make before placing the trade. They are: what to buy, when to buy and how much to buy. After placing the trade, the only thing that can be controlled is when to sell.

Deciding to cut loss in stock requires accepting the idea that the market is never wrong. It is only the trader who can be wrong. This is very difficult for traders to accept because of their egos.

A strategy is only as good as the eagerness to follow one’s own rules. A sound plan takes enactment, which takes discipline. 

The market is a charging taskmaster. If a mistake is made, traders will get penalized financially and emotionally. However, there are ways of protecting with any strategy.