Hey all. I decided to include in my latest blog some of my thoughts on trading. I am doing this partly as a disclaimer to my own suggestions. Also, the company that first introduced me to stock trading, Investools, has been under fire from disgruntled clients who lost money following their system. These clients cried over their losses, called the SEC, and are suing Investools, which I think is a bunch of donkey stuff (kind of sounds like the cries coming from the subprime mortgage victims). Hopefully, I can keep the ranting to a minimum and impart my own views on how to be successful.

As the site name suggests, hedgeagainstspeculation.com, I also thought it might be useful to give my opinion on how to best use the stock suggestions you see. First of all, let me start by saying every trader is different. Cliché I know. But it is true. When I suggest a stock, I am usually bringing it to your attention because the chart of the stock tells me one of several things: it is about to break out, it just broke out, or it is forming a chart pattern that I find interesting. But just because I am seeing something in a chart does not mean it will happen, or that you should make the trade in that stock. With the exception of one or two chart patterns, I always wait for the breakout before I take a position. This usually, but not always, helps to ensure that I am right. Take for example one of my suggestions from the other week, EGOV. I thought it was forming a nice chart pattern. It gave a false breakout on the 16th. Following my own trading rules I got in. After three days, the stock had basically gone sideways. While it may have gone up from here on out, I decided to exit the trade because the stock did not do what I thought it would. I take a small hit at the chance of profit. Eh, oh well. You have to risk to win. That is the name of the game.

This little story brings me to my next point. Which is do not make a trade until you have answered a short list of questions that I find to be very important. The first two are the obvious two: which way am I expecting the stock to move, and where is my entry point? Next comes a tougher question. How much money should I risk, or what should the size of my position be? Then an even tougher question. If the stock goes against me, at what point do I get out? And finally is the toughest of all. If the stock moves for me, when do I take a profit?

The first couple of questions, I usually address with each post, but these other several questions I have been kind of avoiding. And for several reasons, the biggest of which is that I don’t know you, your financial situation, or your risk tolerance. The exit strategies I have set for myself I laid down on paper, and defer to them in ALL situations. When I first started trading, I could find good stocks, and get in at relatively good prices, but my exit strategy was weak, and I ended up either leaving money on the table, or taking larger than necessary losses because I was not being disciplined. The way I do things is based on percentages. I relegate only a certain percent of my money for any one trade. Next, I do not take on a full position right away, but usually limp in as the stock continues to go in my predicted direction. Finally, my stops are based on the percent of the investment I feel I can accept losing. Besides, there are plenty of stocks out there, so if the current stock is running dull, why not preserve the capital and put it into something that will turn a profit.

So here are just a couple suggestions for the yet to be savvy trader. When you see a stock chart being analyzed, do not make the trade unless you truly see the patterns taking place, ie support/resistance, reversal patterns or continuation patterns. Just because a pattern suggests a certain price target does not mean that is the definite place to exit. What if the stock falls just short of that, or what if you get out at that point, and the stock continues to move right on through the target. In both places, lack of proper exit strategies would leave you at a loss of either real or potential value. And in each instance, you would be kicking yourself. In this case, as I approach a price target, I usually don’t exit automatically, but instead tighten up my stops. I may not make the full profit if the stock does stop at this point, but I also keep my position in case that double I just hit turns into a homerun. Finally, lose the ego. Brag about the successful trades once you exit them, but until then, stay humble. This will give you the confidence to keep investing, but will also allow you to follow your rules should the stock go against you. I consider a successful trade to be any trade where I follow my rules, win or lose. Staying humble is the most important part of being successful. There is nothing more efficient at turning small losses into huge ones than hope and ego.

Happy Trading

-Dylan