It's Your
Money...
Take Control
by Robert Deel
A few nights ago while watching a well-known television program I saw a group of financial dinosaurs say the same thing they have been saying for the past 30 years. You could almost smell the cigar smoke in the room as they sat around the table dispensing the same old line. I have to pinch myself because maybe I am asleep. That's it; this is just a nightmare I tell myself. I remove my hands from my eyes; no, they are still there. My mind desperately tries to make sense of what I am hearing. Perhaps, if I am not asleep, then maybe they have been asleep, which would explain a great deal. Obviously, they have not been keeping up with current events. Then without thinking, like a man possessed, I say out loud, "It's your moneytake control!"
Commercial Break
I
watch in utter amazement while this fund manager advocates buying
long a market that is clearly going down. What is his reasoning?
It's cheap and it will turn soon. I cry out "It's cheap
for a reason and why don't you wait until it actually turns up
before you buy long." Obviously he can predict the future
because he certainly isn't paying any attention to what is going
on in the present. I continue to watch as the stomach churns
while Mr. Fund manager suggests to the audience disaster cost
averaging. Finally I can take no more. I reach for my remote
control like a gun fighter for his six-shooter. I hit the off
button to end this assault on my intelligence as fast as possible.
Taking control and
management of your money in today's world is perhaps one of the
most important financial imperatives facing us all.
It's time you took
control of your money. Whenever you automatically put money into
that mutual fund or bought that recommended stock because it
was a so-called good company you relinquished control of your
money (future) to someone else. It is time you took control of
your stock account and pension plan because no one cares more
about your money that you do. It is time to stop being a victim
and become the predator.
Here is a checklist
that should serve you well and possibly keep you from becoming
a victim of professional media nonsense.
Deel's 16 Rules Of Investololgy
1.
Trade With A Plan. Set objectives before you ever buy. Define
all outcomes not only what you will do when it goes right, but
what you will do if you are wrong. Determine the amount of capital
you are willing to lose and conversely, define when you will
take profits. Write out a trading plan on paper and follow it.
Do not buy and hold.
2. Screen Your Trades.
To select trading vehicles you must have a predefined method.
The method cannot be listening to someone on TV telling you what
to do. Select a method based on price momentum and trend. Don't
guess what the future is going to do, go with the current trend.
Your method must consider your individual time frame, and risk
tolerance.
4. Stay With A Trend. Your probabilities of success are far greater if you stay with a definable market trend. Statistically, these trends provide better profit potential with a lower amount of risk. A good rule of thumb is to watch a 50-day exponential moving average of the close. This moving average represents the intermediate trend of a stock. If you perceive the trend beginning to change, act accordingly by taking profits or placing stops to protect your capital or lock in a profit. Do not buy or hold a losing position.
5. Use Money Management Techniques.
Determine the probable dollar losses of your trading plan or investment style based on your trading record for the current year. Then devise a way to generate income through passive sources.
Cutting a loss quickly is the best money management you can have.
Use money market, bond, and stock dividend income to offset losses in your trading portfolio.
If you are in a higher tax bracket use tax-free money market accounts for your profits and other income. You will find that in most cases the tax-free account will give you a better after tax return when compared with the taxable alternative. Covered call options may be appropriate to generate income for your portfolio to offset losses. Be careful here because you can write covered calls into oblivion. If the stock is going against you sell it.
6. Buy And Sell On Confidence. Many times you won't feel quite right about a buy or sell decision. If this feeling persists after you have done all your research and you have followed Deel's Rules to this point, don't take the trade. Too many times individuals try to rationalize a decision. Don't try to find a good reason for making a bad decision. Your decision must be a confident one.
7. Buy Only Liquid Stocks And Liquid Markets. Stay with major markets and stocks with millions of shares in the float. Make sure the average trading volume is enough for you to sell all of your position on any given day. By following this rule you should be assured of a reasonably good execution of your trade. Don't necessarily buy stocks trading on the pink sheets or stocks under $20.00. Stocks trading under $20.00 generally do not have good trend characteristics or predictability. Most professional traders avoid them and so should you.
8. Don't Buy Or Sell On Hot Tips. More money has been lost on hot tips than in the U.S. Treasury. While this is an exaggeration, it does make the point clear. If someone tells you about an investment or trade, research the recommendation before you put one dime of your money into it. Most novice investors and traders fall victim to tips every day. Please don't fall for the story no matter how good it sounds. Always use technical analysis to make your buy and sell decisions and buy or sell based on facts.
9. Do Not Dollar Cost Average. If your timing decision was wrong on an aggressive stock, don't make the problem worse by buying it lower and lower. The probability is that you will only compound the loss. I call this technique disaster cost averaging. Don't buy a stock until the trend is evident. Dollar cost averaging is good for your broker but, if you continue this technique, the broker you will become.
10. No One Wins 100% Of The Time. Many people enter the stock market focused only on the profits and do not consider the losses. If you think for one minute you are going to win one hundred percent of the time you are wrong. Losing is just part of the cost of doing business. Your goal is to make sure you control the risk and do not blindly put your money at risk like a buy and hold investor. You must come to the realization that you will never learn how to win until you first learn how to lose. How you handle loss psychologically is truly the difference between an amateur and a professional. Professional traders don't react the same way as an amateur to loss. When a professional trader loses he or she simply says next. They don't take the loss personally.
11. Always Use Stops. The proper use of stops will protect profits and limit your losses. Look at stops as profit and loss insurance. When you enter a trade you place a stop to limit the loss in case the trade goes against you. When the trade becomes profitable, you use a stop to lock in the profit. Anyone who would argue against risk control by advocating not using stops is a fool indeed. In effect they are saying you should put your capital at unlimited risk. Does this make any sense to you? Of course not, but that is exactly what a buy and hold investor does all the time. Most investors do not use stops because they are afraid of being stopped out. This is a psychological problem of not wanting to be wrong or having to admit to yourself you lost on a trade. It certainly isn't based on logic or strategy. Remember, always use stops if you are carrying a trade overnight.
12. Make The Time. Make the time or suffer the consequences. If you are too busy to manage your money maybe you're too busy. Take a look at your portfolio and if you lost half of your money without knowing it, you can congratulate yourself on being too busy. Was it worth it? Probably not. It doesn't make much sense to work yourself to death and have nothing to show for it. You must take the time to educate yourself and take control of your future.
13. Be Patient And Let Time Be Your Friend. Making money safely takes time the only thing you get in a hurry is in trouble. Remember, "Everyday is not a trading day." Only trade when the sector, market, and the correlating stocks are in trend. Just because you want to trade doesn't mean you should. Only trade when the probabilities are in your favor and let the market come to you. The market is going to do what it is going to do and what you want is irrelevant. Don't become addicted to the action. You are a high-probability, profitable trader. Profits are made the old fashioned way, one trade at a time. Be patient and make time your friend instead of your enemy.
14. Learn From Your Mistakes. The most successful traders and aggressive investors learn from their mistakes. Many even go as far as writing down what went wrong and analyzing the problem. Mistakes can be costly so use them as learning experiences and don't make the same mistakes twice. Unfortunately a large number of people are doomed to make the same mistakes over and over again. This behavior is usually a sign of emotional reactions to price momentum and the absence of any well thought out strategy. My father once told me that the best education was to learn from the mistakes of others. He was right. A quote from Pogo says it all, "We have met the enemy and he is us." Most people fail in the market not because of technology or a lack of information but because of emotional reactions and never learning from their mistakes and the mistakes of others.
15. Know How To Short Stock. Markets do not go up all the time, a painful lesson some have learned over the last three years. From 2000 to the present time we have experienced one of the most agonizing bear markets in the last 70 years. Does this bear market mean that you can't make money? No. What has the trend been for most of the last three years? The obvious answer is down. Common sense says you are to follow the trend, so if the trend has been down then why haven't you been shorting stocks? Only 2% of the American public ever shorts a stock in their lifetime. This is shocking when you understand that markets and stocks fall 67-80 percent faster than they rise. In other words, shorting stocks tends to compound money faster than buying a stock to go long. If you can make money when the market is going down and when it goes up, what is it that you have to be afraid of? Professional traders have made millions the last three years. You must learn to short stocks if you are to have any chance of being successful in today's markets. Fear and ignorance must be overcome because you must know how to short.
16. Follow The Rules. Don't make the same mistakes over and over again. Using this set of 16 trading rules, which has been compiled from over 20 years of experience, should keep you from making many common mistakes. If you follow Deel's rules of Investology, you have a much better chance of success than someone who doesn't. Always remember, there is never any guarantee of success. But if you are properly educated and develop the correct mindset, you have a major advantage. Don't become one of the sheep led to the slaughter by the media nonsense. You must make your own fortune and control your financial destiny. Always remember, it's your money; take controland follow the rules.
Editor's Note: Robert Deel is President of tradingschool.com. Tradingschool.com has been training individuals and professional traders from around the world for over fifteen years. Mr. Deel is a trading strategist, an internationally recognized trading expert and author of Trading The Plan and The Strategic Electronic Day Trader. Mr. Deel's article appeared in Stock Trader's Almanac Investor, 184 Central Ave., P.O. Box 2069, Old Tappan, NJ 07675, 1 year, 12 issues, $195.
