Priorities in Trading

In the years that I have been trading, teaching trading, and writing about trading, probably the question I am most frequently asked is how do I find what stock to trade. While that obviously can be quite important, there are a number of other factors that, to my mind, are at least as important. As anyone who has undergone private coaching with me will tell you, there is much greater emphasis on formulating an overall plan, formulating a plan for a specific trade, money management, reward to risk analysis, exit strategy, and discipline. Even if we aren't a particularly great stock picker, those other elements can serve to save the day and make a trader profitable if used properly.

In my book, "Trade Your Way to Wealth," for example, I go over those elements in some detail, and emphasize the importance of risk awareness and risk management. Shortly, my new book, "Smart Investors Money Machine," will be released, and in it I emphasize the need to create multiple streams of income and discuss quite a number of ways to do just that. Some individuals have suggested that my approach may not lead to fast wealth. I won't dispute that although I will say that some of the strategies I use and about which I write definitely can and do lead to wealth when used appropriately. I am a firm believer, however, that first we need to look to protect capital. There are many ways to do that, but I fear that most retail traders fail to make that a top priority.

Sadly, many of the calls I get inquiring about coaching are from people who have already lost large sums and are looking for ways to stop the bleeding. While "better late than never" is certainly apropos, I earnestly suggest that traders and investors make it an early priority to gain the knowledge of how to protect against catastrophic loss and how to minimize losses in their trading before heading off to put their money at risk. I don't mean you have to call me or hire me for coaching. There is plenty of information available on the internet, in books, and in DVDs that will help in that regard.

So many of us jump in with the hope and expectation of accumulating riches only to have our dreams dashed because we forget that trades can lose as well as win. We have no plan or strategy to protect us if things go the wrong way. We fail to employ a discipline or realize that we must expect that a fair number of trades are going to go the other way. What we need to understand is that we can still make money even when a significant number of trades are losers as long as we pay attention to important things like money management and reward to risk ratios.

I have often said, and I'll say it again, what we need to do to succeed is take our eye off the money and concentrate on making good trades. A good trade can actually lose money if we have followed our plan, employed a reasonable reward to risk ratio, and followed a pre-determined exit strategy to cut losses. A trade that makes money can actually be a not-so-good trade if we fail to follow our plan and cut our profits prematurely because we didn't utilize discipline, but rather followed our emotions.