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Back in the day, when I was on the trading floor of the American Stock Exchange, I would hear (on a pretty daily basis) lists upon lists of reasons "why people shouldn't get in the stock market."
But in my nearly 25 years of experience, there's really only one.
And no, it's got nothing to do with the direction that markets will move…
Why You Should Always Plan Your Trade and Trade Your Plan
It's one thing to know how to do something and it's another to actually do it. Now you may have heard the saying, "he who hesitates is lost." While it's obviously true that you can't make money when you're not investing or trading – you can't lose money, either. And that's exactly what I want to talk to you about…
The only reason to ever sit out of the stock market is when you don't have a complete and thorough money management and trading plan.
Money management involves only risking a certain percentage of your capital – your money – in your trading account. I'm talking about not risking more than between 2% and 5% of your account per trade. This is absolutely crucial because you want to make sure that you're not risking too much on losing trades and making too little on winning trades. And you do this by keeping your risk per trade the same across all trading strategies.
So say, for example, you have a trading account with $25,000 available to trade options. When following the 2% rule, that means you're able to open each trade for no more than $500. And if the trade doesn't work out, you still have 98% of your account left to set up a new trade. In fact, even if you lost 100% of what you paid per trade ($500) on the next five trades in a row, you're looking at a $2,500 loss. Of course that might sting a bit at that time, but it's still only a 10% loss in your account – instead of that entire $25,000.
Trade management involves using price and time targets to maximize your profits and minimize your losses. And the best way to do it is to establish these targets first. Your price target is the price you need the stock, exchange-traded fund (ETF), commodity, or whatever you're trading to hit in order to capture profits. Your time target is the time frame in which you need to hit your price target. You can set both of these targets easily by looking at a stock's past price moves and patterns and eyeballing the time frames in which you need the price moves to happen.
When you've got your plan in place and stick to your guns, you can feel confident about what you're doing and can set yourself up to make money no matter if the markets go up, down, or sideways. It also allows you to remove the emotion from trading and investing that can poten…
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.