Láminas de Diseño Mecánico

As self-made professional traders who have taught hundreds of market players the art of earning a living from the markets, we are frequently asked the following question by our students: “What is the most frequently committed error by aspiring traders?” Our answer: Failure to accept and take losses quickly. We are of the school of thought that believes that traders' most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion. Taking fast, but small, losses is the only approach, the only tool, if you will, that traders have to help ensure this. But not only must traders be willing to take quick but controllable losses, they must accept the fact that losses are, and will always be, a permanent part of their trading existence. This is perhaps the most

singularly difficult fact to grasp. Most struggling traders spend their entire trading lives attempting to run away from losses. They perpetually move from broker to broker, service to service, newsletter to newsletter, trading system to trading system, hoping, praying, dying to find the “holy grail,’’ that perfect pie-in-the-sky approach that will deliver juicy, unbelievable,

ble. Why? Because successful trading, like successful living, is determined by how well we manage our losses, not by how well we avoid them. If you truly desire to become an astute trader, learning how to lose professionally, by keeping losses small, is the master key. That is the skill we need, that is the way to big bucks, and that is what will deliver longevity in the trading business. Take care of your losses by keeping them small, and we assure you that the winners will take care of themselves.

SEED OF WISDOM

Every loss is like a cancer that has the potential to spread all over your account and destroy your entire financial life. Therefore, in order to ensure longevity in the trading business, traders must quickly rid themselves of this cancer whenever it rears its ugly head. Each loss usually starts off small. That's when controlling it, or completely cutting it out, causes little or no pain. The major problem for traders arises when they allow the loss or cancer to spread. Each time a stock is allowed to make deeper in-roads into negative territory, the traders and their ability to act become weaker. Just like a cancer, the growing loss robs the traders of their intellect and eats away at their mental and physical abilities, until they are completely consumed and relegated to being a slave. If you want to become successful, any disease that has the potential to rob you of your future must be kept in check.

How to Eliminate the Sin of Failing to Cut Losses Short

The following action steps will help prevent you from falling prey to the deadliest enemy of all —failure to cut losses:

1. Never place a trade without first determining where you will bail ship if things go wrong. This is the same as saying, “never place a trade without a redefined stop loss.” Taking a trade without determining the price at which you will run for cover is like racing down a steep hill at top speed without any brakes. You may wind up living, but only those who like to flirt with death would every try such a thing.

2. Always adhere to your predetermined stop loss. This should go without being said, but so few aspiring traders are able to muster up enough discipline to do this that we feel compelled to mention it. Why is this so hard to do? Because selling your stock at the stop is clearly admitting that you are wrong. The

action does not bring about warm feelings of pride, nor does it boost one's confidence. But the true master traders have learned to overcome these difficulties. They have become experts at taking their stops with blinding speed. They have done this because they've developed an

intolerance for stocks that are not working for them, and kill them at the first sign of trouble. We teach our traders to view each stock they buy as an employee who has been hired to perform only one job: to rise. If the stock even hints at failing to perform the task for which it was hired, we tell them to instantly fire it, just as they would fire an employee who utterly refused to do his or her tasks. We train our traders to be so intolerant of stocks that fail to live up to their

expectations that, at times, they fire them before they hit their stops.

3. If you are having a tough time adhering to your stops, start off by getting into the habit of selling half of your position. Becoming disciplined enough to religiously cut losses takes time. Placing and adhering to stops deal with the art of taking a loss, which is why they are so often approached with reluctance and dealt with from a basis of pain. For those students of ours who can' seem to bring themselves to the point of taking their stops without a second thought, we encourage them to practice selling half their position. This alternative action is much easier to do, as it tends to please both dueling impulses: (a) the impulse to get rid of the failing stock and (b) the impulse to give it a chance to come back. By cutting the problem in half, the traders often gain a greater clarity and mental focus. Psychologically, traders find their plight to be less

burdensome and therefore feel better about themselves. The problem of what to do with the second half still remains, but with half the problem gone, coming up with an alternative plan becomes much easier. Note: We deal with the art of placing stop losses in detail in Chapter 15. DEADLY SIN #2: DOLLAR COUNTING

Oscar Wilde once said, “When I was young, I used to think that money was the most important thing. Now that I'm older, I know that it is.” The goal and focus of every short-term trader is profits. Entertainment, action, the thrill of victory, even the agony of defeat can be attractive and

very enticing lures. But it is the potential to dramatically increase one' wealth that wets the pallet and lights the fire of most market players. In short, it is making money that is the driving force behind the desire to trade and invest. But while profitability is, and certainly should be, the primary objective, once a trade is taken, traders must work to forget their profits. Sound confusing? Let us explain. Constantly monitoring how much a trade is up or down is a destructive activity that has been robbing traders of big profits for years. This process,

commonly referred to as dollar counting, not only increases fear, it promotes moment-to-moment uncertainty and prevents one from focusing on proper technique. And it is proper technique that ultimately determines how profitable we become. How many times has the fear of giving back a tiny profit knocked you out of a stock just before it went on to score big price gains? How many times has the paralyzing effect of a loss prevented you from cutting a stock loose precisely when you should have? The fact is, focusing too much on where you are, at the expense of what you're supposed to be doing, leads to knee-jerk reactions and quick responses that lack intelligence and reason. Instead, traders must make sure that their techniques are sound at every step; and if that is done properly, the profits will take care of themselves. “Am I entering the trade at the right

place?” “Is my stop loss—mental or otherwise—properly set?” ‘‘What is my price objective and what course of action will I take once it's met?” These are just a few of the questions that traders should perpetually ask themselves. Your actions should be dictated by a well-thought out trading plan, which we will provide for you in this book, not by the minute-to-minute changes in your account. Good technique automatically leads to good profits.

SEED OF WISDOM

Dollar counting is a sin usually committed by traders who are not used to winning very often. As soon as these traders luck into a small gain, the fear of losing it causes their eyes to bulge, their hands to twitch, and their breath to quicken. In some cases, the money, not yet rightfully theirs, starts to burn a hole in their pockets, until the urge to cut the trade short completely consumes them. This dreadful habit of counting one's pennies in midstream like a Scrooge not only robs the trader of sizable gains, it fosters chronic uncertainty, fear of loss, and an emotional imbalance that can lead to destructive actions. Soldiers (traders) who start tallying the spoils (profits) of war before the battle (trade) is won are majoring in the most minor thing at hand. They fail or refuse to recognize that the

spoils automatically come with a battle well fought and won. To focus too heavily on the spoils is to take one's attention away from the battle. And warriors, who take their attention off the battle, will often lose the spoils and their heads.

How to Eliminate the Sin of Dollar Counting

We teach our in-house traders to focus on their technique, not their profits or losses. We train them to let their well-executed strategies take them out of their trades. If you find yourself being robbed of bigger gains because of the deadly sin of dollar counting, consider the following steps:

1. For each trade, establish two potential exit prices, at which you will sell your entire position. The first of these sell points should be placed below the current price. This is what is called a stop loss. The second should be placed above the current price. This is where you expect the stock to go and serves as your price objective. Example: You buy XYZ at a price of $20. You immediately establish a stop loss at $19. This can be what is called a mental stop or an actual one. You also establish, in this case mentally, a price objective of $22. Tip: Each trade you take should always have one entry point and two exit points, namely, the stop loss and the objective. The stop loss is used for protection. The objective is used for profit taking. There will be more on this subject in a later chapter.

2. Sell only if the stock you are in violates the stop loss point or hits your objective, whichever event occurs first. By adhering to this rule, traders place the fate of each trade in the hands of their trading strategy, not in the hands of their greed or fear. To continue with the previous

example, you would sell if XYZ declined to $19, resulting in a $400 loss. You would also sell if XYZ rose to $22, resulting in an $800 gain.

3. If the urge to exit before either sell point is met becomes overbearing, satisfy the urge by selling only half and letting the remaining half sit until the strategy says exit. For instance, let's say XYZ rises to $21, shortly after you buy it. You now have a paper profit of $400, but your strategy has not called for any action yet. However, the $400 gain you can lock in now is starting to look too delicious to ignore. While you recognize that $800 would be better, your dollar

thinking straight and the fear that the $400 gain may evaporate is creating a powerful urge to take the money and run. You can sell 200 shares at $21, locking in a gain of $200, while giving the remaining 200 shares a chance to go the entire distance. By doing this, you satisfy the urge to sell, while retaining the integrity of your trading strategy. These three steps will help you weaken, ifnotcompletelyeliminate,the deadlysincalled dollar counting.