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Trading Discipline

Let's briefly discuss goal-based trading and discipline. I have noticed an increase in the number of posts expressing dismay that after selling an issue, it takes off. I think this happens to all of us. After reviewing many of my trades over the past quarter and scrutinizing the timing and events that lead to my early exit, I found that two things caused an "early" sale:

1) My mental, or physical, stop loss had been hit.
2) I sold due to being impatient.

Discipline is the most important factor in trading in my humble opinion. It separates those that will be profitable in their activities from the "hopes and dreams" traders. You cannot fault yourself for protecting your capital and exiting a position due to a stop loss. You must continue to cut your losses before you can no longer afford to cut them. Just by sheer law of averages, many stocks will run after you have sold. There is nothing you can do to stop this, but also realize there is nothing wrong with buying on the strength if your judgement tells you it can go further. Just make sure to reassess your risk tolerance and set your stop appropriately.

But you must pick your stocks, and their related stories, carefully. When trading into one of these event driven issues, you must have a goal in mind. Know why you are entering the position and what your expectations are. Also, just as important, know your risk tolerance and set your stop limits wisely. Regardless of the story, if you are able to lower your cost of the issue, ultimately it is money in your pocket. Never blindly allow yourself to be married to an issue or its story.

This is what I describe as having "day trader tendencies". Always reassess your situation and the event that spurred your action but do not let your patience level cause you to miss out on opportunity that you believe will be a money maker. Basically what I am saying is that if you allow an issue's non performance to dictate your exit strategy, you may be leaving money on the table. If the story is still intact, and the variables remain the same, why exit the position. However, you must still stick to your discipline of selling a losing trade if your stop is hit.

We are traders here and, by nature, we are impatient. We will argue that the money is better used on an issue that is "in play" rather than stick with the non performer and that "we can always buy it back". But look at your trades and discover how often you buy back the same issue at a much higher price because you were not willing to pay the current price at which it was not performing.

I have resolved to not let impatience solely dictate my actions. We must keep our wits about us on every trade and must be in the habit of scrutinizing that trade before we hit that buy/sell button. Goal based trading. When you enter the position, state aloud to yourself, or on paper, why it is you are taking the position and what do you expect the outcome to be. Then, we are selling the issue, reevaluate your goals and determine if you are selling because of:

1) Your stop has been hit and you MUST sell
2) Circumstances have changed that make your goals unattainable
3) You are getting impatient

Event based trading, when used properly and objectively, can work. Find those issues that have a story attached that will unfold over a month and will be told through multiple PR releases but beware the story where the news comes out, and the stock runs 100+% but there is nothing to sustain the stock.

Remember what moves stocks higher, rumor, hype, and expectation. Remember what moves stocks lower, an end to the mystery. As long as something remains that serves to intrigue the traders and investors, the issue will be in play and there will be many opportunities. But once the intrigue as faded, little remains.

Buy the rumor, sell the news. Plain and simple. But always remember that capital preservation is just as important as capital appreciation, and arguable more so. Trade well and stick to your discipline.