Better Trades Can Boost Your Trading Earnings

Better Trades Can Boost Your Trading Earnings

Would you like to see more gains in revenue? Then strive for lower losses!

The name's Eldridge, and I'm here to tell you about a simple way to increase your trading profits. It's a basic principle, but it's crucial if you want to keep making sales for any period of time. The idea is to limit not just the total number of losses but also their monetary value. I know that seems like such a no-brainer that you might want to throw this post away in favor of some mindless TV, but bear with me. I'm about to reveal some information that you won't discover anywhere else!

Imagine a giant washtub, the kind you may remember from your own youth, to help you better understand the idea I'm presenting. Imagine the hassle of filling the tub if it has several "six-inch" holes in the base. There's a problem, and no matter how many garden hoses you use to try to fill it, the water drains out at a faster rate than it's being added. 

Let's pretend now that we're going to individually seal each of these cracks. If you plug the first one in, you won't notice much of a change. If you plug the second hole, you'll see that water is dripping to the ground less frequently. And if you plug in the third, you might see the water level in the tub start to rise, albeit slowly. If you seal up every crack but one, you'll notice a significant improvement. 

Let's start patching that hole up one at a time, now that you're down to just one. First, we plug half of the hole, and while the tub is still leaking, you can see that more water is entering the tub than escaping through the drain.As long as more water is entering than leaving, it's acceptable if some escapes after you plug up half the leak.

That's roughly how our trading accounts work. Most novice traders have massive "holes" in their trading accounts, with money disappearing quicker than they can replenish it. Some of their trades may be profitable, but they always end up giving it all back. If we're being prudent traders, we'll stop trading until we identify the problem and fix it. What I am presenting is the direct result of giving priority to making money rather than preventing losses. Many factors contribute to this, but the end consequence is the same. If we don't do anything, this will put us out of business as merchants in a hurry. Have you ever felt this way about your trading account? Is it something you want to know how to "fix?" I've found that following these four trading rules can help "plug" many of your profit leaks and reduce your losses.

Before entering a trade, stop and wait for confirmation that the stock is moving in the expected direction.

That's why this regulation can cut down on your overall losses. Despite its apparent obviousness, this is a common trading mistake. Everybody is used to hearing lovely little descriptions like "grabbing a falling piano" or "reaching for a falling knife" because this rule is broken so frequently. The price movement up or down, momentum, the number of trades, or the "magnitude" of the bid and ask are all examples of confirmation methods. For myself, I use a mix of all of them, forming a gut "feeling" rather than a hard number about the confirmation. Confirmation might mean different things to different people, but experience will teach you not to trade until you are confident the stock is heading in the direction you want it to.

Set a stop-loss order once you've been filled on the entry to limit your losses.

The amount you can lose in a single deal is limited by this rule. When setting a stop loss, I usually choose a percentage that is equal to half of the stock's daily volatility. As an illustration, if a stock's price fluctuates by an average of $1 per trading day, I might reduce my exposure to the trade by 50%, or $50, by setting my stop loss at $50. Whatever method you choose, you must be loyal to the safety provided by the halt. Therefore, do not alter it. You can't go anywhere when you're detained. Whoever strikes a deal and then walks away gets to strike another the next day.

The plan to reduce casualties and costs failed miserably. Maximizing your profits while doing so is also crucial. Learn the steps right here.

If a trade turns a profit, the stop loss should be replaced with a trailing stop that trails by the amount of the trade's profit.

To me, this is so crucial that it should be added as Amendment Number 22 to the United States Constitution. Let's pretend you've got a 25-cent profit on a transaction and a 50-cent stop loss (on long positions). Put in a 25-cent trailing stop in place of the stop loss. You have already broken even, give or take a few cents, on the worst-case scenario of the trade. This is the point in the trade that I call "the magic point" in my live trading lab on my website. From that point on, you have very little to lose and a lot to gain.

And now, for all you "do-it-yourself" traders out there...

Don't interfere with the market any more.

If the aforementioned guidelines are followed, the market as a whole will do a far superior job of trade management than either of us could. After you've made it to the magic point in your profession, it's time to move on. Everything about your trade is hands-free.

It's been a pleasure telling you about this. Let's hope it makes you a more successful trader.