Each trading plan should comprise three sections that are interrelated. These are
I have been doing seminars on stock trading for many years. I know that when I mention 2 and 3 for more than a few minutes the audience eyes glass over. When I keep the conversation on the method, and especially entry points, the audience is attentive and eager to learn.
The same goes for most of the text books on trading. The authors know well that if they focus on 2 and 3 that the book simply won’t sell.
How VectorVest addresses the 3 Vital Parts to every trading plan
At VectorVest, we believe in buying undervalued shares with outstanding earnings growth that are rising when the overall market is rising. VectorVest does all the heavy lifting of assessing and calculating the fundamentals surrounding valuation, earnings growth and earning safety. The VectorVest Worry-Free Investing plan (WFI) is a great place to start your trading/investing business. The rules are fully disclosed and have been tested over the last 26 years with great results. The WFI can be kept under control in a few minutes a week and can fit into the busiest of schedules. That’s section 1 above taken care of.
Money management is quite easy except few pay the concept any attention. It simply says that the most you should lose if the trade/investment goes awry is 1% of your account size. Here the first question you need to answer is “How much money is in my account”?
Few can answer this. If you don’t know how much money is in your account, then you can’t size your positions correctly and if you cannot size your positions correctly, then you are gambling and not trading.
If you have 50000 pounds to start your trading/investing business, then 1% of that is 500 pounds. You should not lose more than 500 pounds in any single trade. Don’t stress if it’s a little more or a little less. That won’t kill you. It’s losing 25% of the account that will kill you both financially and emotionally. There is a big paradox here. You have done all the homework. The share looks excellent both fundamentally and technically. The devil on your shoulder says “hey it’s a sitter, let’s have a big punt”. The reality is that if you have a methodology that’s correct 80% of the time, then it is wrong 20% of the time. On the next trade you don’t know whether it’s one of the 80 or one of the 20. The market cannot be predicted on a trade-by-trade basis. Over a batch of trades there is a massive edge but on a single trade NO ONE knows what’s going to happen next.
Built into the VectorVest program is the excellent “Successful Investing Quick Start Course (SIQSC)”. In lesson 2 of the course, the simple math of position-sizing is covered in detail with many examples. This calculation will keep you alive in the financial markets.
Play the game of trading and investing
With that done the only barrier remaining between you and the unlimited wealth that the stock market can give you is playing the “game of trading and investing”.
This is much more difficult than it sounds. There seems to be more trading psychologists around these days than traders for that reason. I am reminded of a story in the Economist a few years ago which reported on deaths of elderly people caused by burst pipes during a cold spell. The Economist concluded that in London it was easier to find a psychologist to talk you through the trauma than to find a plumber to fix the pipe.
Again, the WFI method is a great place to start to build experience. It only invests in companies that have an excellent record of making money year in and year out. When the overall market is rising, then there is a very small probability of a surprise in earnings. It can happen but it’s unlikely. The WFI will allow you to make money and build the belief that “I am a consistently winning trader”.
It’s still going to take some effort to follow the rules to the letter. I normally set new traders a goal, to grit their teeth and follow the rules to the letter, for a batch of 30 trades. It rarely takes that long to build the habit. After around 5 to 8 trades, a new neural pathway has been built in your mind using a concept that psychologists refer to a “neuroplasticity”.
You are 8 trades away from being the trader you want to become.
Jan 26th 2018