Morning Market Thoughts
Good morning. I hope you enjoyed your three day weekend and got to spend time with family and/or friends during the holiday. Many folks tend to work so hard to make ends meet that they really need a day off once in a while to remember the reasons why they work so darned hard. One extra day can make all the difference in the world because it gives you time to wind down from a busy week, and get to a point where you truly start appreciating all the blessings that you have. And when we appreciate our blessings, it makes it a bit more palatable to get back to work and earn what it takes to keep those blessings.We are entering the most active part of the year, with a busier September preceding what will probe to be a very very busy October. And November? Given the importance of the presidential election, as well as Senate and Congressional seats, November should prove to be a real doozy. (Note: I believe this is the first time I have ever used the word “doozy” in a morning note. First time for everything, I guess.) So as we enter the season that tends to be the most profitable for prudent and disciplined traders and investors, make sure that your number one priority is just keeping what you have.
Your profitable trading positions do not consist of your money and the house’s money. You own ALL of your position. Each and every position. You might have three consecutive winning trades on one stock. If you happen to buy that stock again, it is a new trade. It is an independent, singular trade that has no relation to prior trades. You’re exchanging YOUR money for the stock. The fact that you’ve made money on the stock before does not make this new trade anything but another trade with YOUR money. If you start treating some trades as being with “the house’s” money, you will start giving back your profits from prior trades because you’ll be a bit more nonchalant about it. You’ll think, “Well, what the heck. I’ve made good money on this stock. I’m playing with the house’s’ money, so I’ll ‘take a shot’. Setup isn’t great, but what do I have to lose? It’s not really my money?”
Can you see the problem? If you trade like this, you will ultimately reduce your profitability. Since everyone is wrong a significant amount of time, the most important mathematical formula for you is this: “Winners – Losers = Profit or Loss”. When you reduce the total value of your winners, your losers become much larger relative to the winners. The equation gets skewed to the losers outweighing the winners, and the end result is a losing portfolio. So protect your winners and try to let them run farther. Remember that you don’t get to control the movement of the stock. We want every stock to run a long way in the direction of our trade. We hope for a large profit when we enter a trade — after determining the risk we are willing to take, of course. But we want the stock to run so that we can make a lot of money on the stock. Sometimes that happens, but many times it doesn’t. Many times the stock runs just a little bit and then peters out. Or the stock may reverse and give you a small loss (small…because you have defined the maximum risk you are going to take on a trade).
So because those big runners don’t happen all the time, it’s important to (1) let them run as long as possible, averaging up when it’s prudent to do so, scaling out by selling part of your position when the stock looks like it may rest a bit…and buying it back if the “rest” turns out to be some sideways-to-down consolidation that ultimately starts returning to a nice uptrend, and (2) respect those gains and avoid frittering them away through a series of poor trading decisions because you don’t believe that the profits from the big trade are really yours!
Developing this mindset is critical to long-term success. If you can’t adopt this mindset where the profit and loss in every trade is YOUR profit or loss, then you’ll ultimately be subject to the vagaries of the market — making money while it’s moving higher, and giving it back when it’s moving lower.
The past few months have been difficult because there has just been no movement in the entire market. But there have been plenty of stocks that have been moving nicely. There will continue to be stocks that move quite well, even in a stagnant market. Focus on those, and don’t worry about yesterday’s great stocks that everyone seems to tout in financial media. Focus on stocks that are in good, tradable uptrends. If they’re below the radar, all the better. You want to be in stealth trades when you can, and in the high profile trades (like FB and AMZN) when it’s prudent and profitable to be in them.
But irrespective of what trades you are in (including a large cash position), remember that it is all your money. You don’t have to share your profits with anyone, and you don’t get to share your losses either. They are all yours.
Strive for: “Total Profits > Total Losses”
Do this, and you’ll find yourself counting a lot more money than you used to have.
See you in the forum.
–Dan
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