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If you've ever had the good fortune to lose yourself between the covers of "The Adventures of Sherlock Holmes," you remember the contrast between Holmes and his trusty sidekick, Dr. John Watson. All the movie and TV adaptions, good though they may be, can't do justice to that wonderful literary partnership.
As you'll recall, Watson was a romantic - enchanted by mysterious adventuresses and improbable tales, and always ready to go on a wild goose chase or rescue a damsel in distress (like the fetching Miss Mary Morstan in "The Sign of The Four," whom he later married).
Holmes, on the other hand, took emotion out of the equation entirely and looked only at logic. (Analysts differ on whether he was a psychopath or a sociopath.) He saw people only as problems, and situations only as cases, and never, never allowed feelings to cloud his judgment.
He sums up his personal philosophy in a rather chilling paragraph:
"It is of the first importance... not to allow your judgment to be biased by personal qualities. A client is to me a mere unit, a factor in a problem. The emotional qualities are antagonistic to clear reasoning. I assure you that the most winning woman I ever knew was hanged for poisoning three little children for their insurance money, and the most repellent man of my acquaintance is a philanthropist who has spent nearly a quarter of a million upon the London poor."
While that perspective makes for a lonely life (Holmes, as far as we know, never found true love), it works wonders when solving mysteries.
Incidentally, it's a great trading strategy as well.
My personal sympathies lie with Dr. Watson, of course... but as a trader, I've had to train myself to think like Holmes. It's served me excellently and will serve you well, too.
Here's how to take emotion out of your trading - and why that could save you from some very costly mistakes...
Stick to "The Plan" Even When Your Heart Tells You Not To
"Follow your heart" works well in Disney animated movies, but in trading, it's simply disastrous advice. Your heart is frequently wrong. Your "gut" is frequently wrong.
The charts, on the other hand, are frequently right.
Investing is hard work. It takes patience, it takes research and it takes a steady hand. And everyone is going to have a few losers as the market is always imperfect. The key is to not get emotional and to have a plan before you enter a trade.
BIG, FAST PROFITS: One pick paid 100% in seven days, then 205% the next day, and 410% by the next week. You've got to see how it's done...
I know that it's a hard thing to do. After all, you worked diligently for your portfolio money and you want it to work - not head down the proverbial drain. I have a plan for how to get you to the first million and more to follow... and at the core of the plan is to check your emotions before you go to work on your next trade.
Emotions make traders make mistakes. They buy a position with excitement and enthusiasm and if it starts going their way, the excitement can build - clouding the thinking and the expectations of the trade. And if the trade unexpectedly heads south, too many will get nervous and fret about failure.
The key is to have a plan and stick to it.
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When you buy a stock or an option, you must have a clear and reasonable reason for entering the trade. Before you pull the trigger, explain to yourself what you are doing and why you are doing it. If you can't explain it to yourself - it's not the trade for you.
Next, have a clear objective for the trade. Understand what you expect it to rise to in price, and know that if and when it hits that target, you should be ready to sell and book the profit.
Don't get greedy and think that you should just let it ride hoping for some bonus returns. That's a surefire recipe for letting profits drift away from you.
Then have a plan for the downside. Every trade I put on and recommend I have a stop-loss level and have the order at the ready. Never hold and hope that something might work out. Hold and hope is a surefire way to lose even more money. Take the loss, learn from the loss, and work on seeing the reasons for why the market didn't go as expected.
How Our Plan Works - and How It Just Saved Us from a Major Misstep
This brings us back to the three steps of the 10-Minute Millionaire trading strategy. First, we find the extreme. Nearly every day I can find stocks that are out of sync with the realities of their underlying business values... especially right now, as the collision of two market narratives, "Trump growth" and "Fed unwind," causes extra volatility.
Once I find a company whose stock is either too cheap or too dear, then it comes to step two: frame the trade.
Framing the trade identifies where the stock is now and where I expect it to go - either up or down and the entry price to execute the trade. And even more important is the escape plan.
This escape plan is to make sure that I can guide you through the trade so that if the market does the opposite of what I expect, you will be able to exit and control the loss. This means that if you frame your trade - and keep your emotions in check - you'll be able to know upfront what your potential cost might be if the trade doesn't work as planned.
That way, you'll know completely what to expect, and if the trade fits with your risk and return parameters and you can profit while still being able to sleep tight.
And the important third step - book the profits. As I mentioned above - emotions don't just get the best of us in a loss as they can also get the best of us with a gain. Never just let a profit run hoping that a stock price will run forever in your direction. Always follow the frame of the trade. So, when the stock price hits the target - book it and move to the next opportunity.
Now there are four primary means of exiting a framed trade.
First, is a market order. Sometimes it makes sense not to broadcast your intentions to the market makers as to the price that you will close out a long or short sale of a stock. This can be when volumes are lower. So in this case, I'll tell you the price to exit and then when the market hits that level - you'll hit the sell button and use a market order.
Second, is a limit order. This is an order that's entered at the start of the framed trade or while we have an open trade. The limit order is given to the market makers and can only be executed at the price or better. So, for a sell limit order on a long trade - the market maker can only execute at the price or better. And for a short sale limit order, the market maker can only execute the buy back trade at or below the limit price. The challenge for this type of order is that in a fast-moving market, these orders might not get executed to stave off further losses or lock in the gains. So, I'm careful when I frame a trade using the limit order.
Third and fourth are the stop loss and buy stop orders. These orders are triggered when a stock hits a specified price. Then the order is turned into a market order. So when I frame a trade with a long strategy, I'll instruct a safeguard bailout stop loss order that will get you out if a specified price action occurs. And for a short sale, if a stock climbs rather than falling - the buy stop order will limit the damage.
We just saw a beautiful example of this not long ago in Stealth Profits Trader. (If you're a subscriber, you can read the full story here.)
After taking 390.4% profits on the last tranche of our WYNN calls, we took up to 19% gains on the stock and had 25% of our position open when the news of founder Steven Wynn's alleged sexual misconduct and resignation sent shares of Wynn stock plummeting.
When this kind of news hits, having our systematic risk protection in place pays huge dividends. We hit our profit-protecting exit for a +16% gain on the remaining shares. The price subsequently went into a free-fall, dropping an additional 15%.
That's a great exit amid huge controversy, and a great example of why we don't "change the plan" mid-stride based on emotion.
The key is to have the framed trade and to stick to the plan and keep the emotions in check to book more profits.
And finally, never look back. Watson frequently regrets what might have been, but Holmes cheerily moves on to the next problem, as the close of "The Adventure of The Copper Beeches" shows.
"As to Miss Violet Hunter, my friend Holmes, rather to my disappointment, manifested no further interest in her when once she had ceased to be the centre of one of his problems, and she is now the head of a private school at Walsall, where I believe that she has met with considerable success."
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The post Cut Your Losses Dramatically By Trading Like Sherlock Holmes appeared first on 10 Minute Millionaire.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.