I love talking about trading with anyone, anywhere.
We covered a host of topics, and he’s just a great guy to chat with.
Early on in the interview, I talked about my time as a hedge fund manager when I lost $1 million.
Back then, I only had $3 million to my name, so it was a big hit to the pocketbook and the ego.
Yet, it taught me one of the most valuable lessons I ever learned…
Never fall in love!
You see, every time I became emotionally involved with a stock, I lost perspective.
Even when the market threw up clear sell signals, I rationalized my behavior and held onto losing positions that got worse.
Thankfully, I no longer look at things the same way.
And it takes just three simple steps that anyone can implement.
Step 1: Price Action Reigns King
My hedge fund days were brutal. Movies like Wolf of Wall Street don’t really do justice to the amount of time and energy you pour into the work.
It’s why these money managers struggle to come off a position. They worked incredibly hard to analyze and dissect the fundamentals and story behind whatever stock they were looking at.
So, who wants to be bothered by a little thing like price action?
The housing crash in 2008 illustrates this.
Condos that were once worth $250,000 sold for $50,000.
You could actually buy that condo and rent it out for $1,000 a month, getting a 24% annual return on your investment.
The problem was too few people could afford to buy that condo.
I remember people complaining that their home was worth more. Any asset is only worth what someone is willing to pay for it.
A diamond-encrusted chair isn’t worth squat if the people willing to buy it make minimum wage.
Every stock I encounter, no matter the story, is only as good as its price action.
I used Roe v. Wade news as a catalyst for the trade. But that was it. I didn’t care about the company’s cash flows or future prospects.
All I saw was a story, a stock, and bullish behavior on the Friday of the news.
In fact, this next step is a crucial step to aligning your mindset to proper risk management.
Step 2: Expect Stocks to Disappoint
Never expect a stock to run. Always assume it’s going to fail.
This isn’t a cynical mindset but a risk management strategy.
One of the first lessons I teach my students is to cut losses quickly.
This serves two purposes.
First, it’s simple risk management and avoids big losers.
Second, it helps me reset my mind and avoid becoming too attached to the stock.
For the first half of 2020, I made a bit more than $80,000. Yet, few of my trades were anything special.
It was a lot of small wins that added up over time.
By thinking that a stock would fail, I narrowed my focus to the best setups and waited for my entries rather than chasing them.
When I got into trades, this mindset helped me lock in profits sooner.
However, this didn’t prevent me from taking advantage of runners. Using price action as my guide, I’d let stocks push higher when volume came in while dropping positions when they floated sideways.
Step 3: Focus on Decision Making
Every time I get into a trade, I expect to win.
I can’t control whether that happens or not.
The only thing in my control is the decisions I make: where to enter, my position size, the profit target, and stop loss.
Traders can make the right decisions and still lose. It happens all the time.
But over time, with a winning strategy, if you stick to the plan and execute it correctly, profits will come.
Now, the tough part is determining whether you have a good plan or not from the outset.
Not only is it easily identifiable but offers multiple ways to trade it based on your style.