Stages of a Successful Trade

You probably heard that trading is a gambling, but the trick is that you are not forced to lose all at once. With trading, you decide, what game to play (the same as gambling), when to get in (almost the same as gambling), how long to hold (nothing like gambling) and when to get out (not at 4am in the morning).

-01- Idea / Discovery / New Information
First step is to discover a new company and make a note of it on your Monitor Sheet (whatever tool you are using). This part is also can be called “Building your confidence level”.

What are examples of such discoveries / ideas? The most obvious is search for “Probable Soon Reversals”.  You might decide to search for companies with tons of negative news, with lots of Sell marks from specialists, with discontinued dividends and with no debt – very important! This could be an example of an idea. Go with it.

-02- Two Ways of Waiting
Next part is waiting. Wait for a perfect chance to get in. This is the most difficult part, because it doesn’t require you to do anything. Perfect entry point increases your chances for a successful trade.
There are two ways of waiting: one with limit order and the other – with stock alerts.

With a limit order you see XOM at $66 and decide to get in at $58. This one is for situations, when you want to enter the position even, if stock goes bellow your limit price.

Stock Alert is appropriate, if you want to re-evaluate your entrance level, when your desired price level is met.

Size of your initial entry must reflect your readiness to increase your commitment, if stock moves against you. Do not enter all at once.

Milton Friedman – Capitalism and Freedom  
Pure Liberty and Equality is quite incompatible. This book is more ideological than scientific, but it is very hot. But if books like this can’t reverse the trend to sprouting Government, what else can?

-03- Getting In
Never get in with a market order. Always get in with Limit All-or-None options checked. I’ve noticed that it gives you two important advantages. First, you purchase all your shares at the same price. That is good for recording, tracking and reporting. And second, it could give you a slightly lower entering price.

-04- Surviving Good and Bad News
There is another side of waiting – waiting, when you are in a position.  Use this step to improve your odds.

You used your first tool – judgment to pick a perfect entry price. Now you are in. You can use only two remaining tools in your disposal. Either close (sell) or extend your position (buy more) at a better price. That is simple. If you do not have cash remaining on your account, you deprive yourself of 50% of freedom. Without free cash on an account you can only “pray” or sell.  You can’t buy.

-05- Art of Getting out
Set your expectations for every stock your hold.
Do not panic and sell on bad news – that is how you lose big.
Do not exit with market orders.
Set your minimum unit of time at a week length.  It means measure performance in weeks, not in hours or days.

-05+ POSITIVEGetting out in Black
In this scenario, you’ve still love the pick you made, but you follow the rule to take profits off the table – to get out while in black. The biggest danger here is getting out too early.  I made this mistake continuously.  If you sell too early, you miss all the fun of doubling and tripling on the way up.  If you sell too early, you deny the validity of your own idea of a soon reversal.

-05- NEGATIVE 01Getting out, if Your Lost Confidence in the position
If you lost confidence about your pick – sell the stock in red. Still wait for a positive day and positive hour and positive minute. But do not hesitate. When your loosing stock suddenly jumps, pull the trigger.  When you finally sold, you can think straight again.

-05- NEGATIVE 02Getting out to Record a Loss
Get out of all you loosing positions as December 31 approaches. This is for tax purposes. Do not carry your losses into a new year. Sell your loosing positions, show a loss and move on.

Wash Sale Rule:
You have to wait for 30 days before re-enter into the same stock and carry it into the next year. This rule called wash sale rule and it applies only to individual investors. Start looking for a good exit opportunity on your loosing positions around November 15. That way, if you could probably sell some time in December, and be ready to buy the same stock some time in January. Financial institutions are closing their fiscal year on November 30. Wash Sale rule doesn’t apply to them. They will start re-adjusting their portfolio in January. And you should be ready by January to jump back into the game (back into your abandoned position).

-06- Recording Your Results
There are 5 pieces of information that you need to record your trade and later report it to IRS.
        -01- First, a free hand description, like “100 AAPL” (means 100 shares of Apple)
        -02- Second, the date you got in.
        -03- Third, your cost basis, i.e. how much money you spend including commissions paid.
        -04- Forth, date you got out.
        -05- Fifth, your proceeds, minus commissions.

Multi-Layer Entrance

You entered at a wonderful price, but stock continues to fall. Nothing changed, and you still consider the company a bargain, but stock keeps falling. Instead of panicking and praying, set you next unbelievable entrance price and look forward to get in for a second time for even better price. Allow yourself up to 3 entries into the same stock. Your first entry was already at a significant drop in price (5-15%). You second entry point could be another 10-20% below that. Your third entry price could be 20-25 bellow that. Do not enter for the fourth time. Either wait or get out by the year end.

Multi-Layer Exit
You exit in reverse order. As soon as stock begins to show signs of strength, you sell the last set of shares with profit. If it continues to grow, you exit your second set of shares with profit. By that time, although you first lot is still in negative territory, you might be in black for this stock already. It is such a pleasure to sell third and second lots, knowing that your first lot can still catch an upward move, if it occurs.

What to do after you Sold?

The reason you sold is usually due to your belief that stock has more likely to go down from here at least for the short term. It means that you should immediately set a new lower entry point for the stock, if you still love it.

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