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How to Survive Trading Stocks and Options

Updated on February 20, 2012

Survival is Key

When entering the game of trading most think in terms of how much money can I make. But really the greater question is, "Can you survive long enough to stay in the game?"

If you don't have the correct survival skills then you won't be able to endure the difficult times. There are many people who have survival skills for the wilderness. You can put them in any type of geographic location and they will survive because they understand how to operate in a method that will keep them alive. The same is true in the game of the markets. You can't just do anything and still make money, but if you know how to do the right things then you can make money in any market.

That's what I want to talk to you about in this HUB. What are the right things that you need to know? If you will take the time to understand these critical points you can position yourself to make money in the markets.

Trading is Strategic!

I like to shoot guns. Sometimes I will go out and just shoot. Sometimes I will take my 9mm semi automatic and just see how fast I can unload the clip. In trading this is a BIG no-no!

Don't trade to just be trading. Don't trade just because you have money to trade. The hard part about this is that we rationalize that if I have money just sitting there I am loosing profits. But the truth is, if you are not in the right trade you will not only loose the potential profits, but you will loose your capital.

As one famous trader once said, "Not trading is a position." You need to be like the Anaconda, which is not an exciting animal of prey. The Cheetah is much more fun to watch, but the Anaconda is far more successful. He will just sit and wait for the right opportunity to come to him and when close enough he will attack.

You and I, as traders, MUST wait for the right set up. It is far better to let your cash sit for a few days waiting for the right set up then it is to jump into something just because you want to trade.

You don't have to be right all the time in order to be successful, but if you are wrong all the time you will never be successful. All you need are a few good trades a year and you came make a lot of money. So don't get caught up in the hype, just look for the right set-ups and only enter when the odds favor your success.

Define Your Entry and Exit Points

Picking up on statements of the last paragraph, you must know your entry and exit points. In other words you need a trading strategy. If you don't have a strategy then you will consistently buy and sell at the wrong times.

There are two primary methods of trading which are called Technical and Fundamental. Both have their legitimate entry and exit points, but using a combination of bother is even stronger. If you are prone to ready a lot of newsletters you are going to find yourself getting excited about every article that you read thinking that it is a winner. Believe me I've made this mistake and had to learn the hard way.

Even today I have four positions that have sat in my account for years that are worth virtually nothing. If I am lucky, one day they may become something or another company may buy them out, but as for now I sit holding these dogs because it would cost me more in commissions to sell them then what I would receive.

Why did I make these stupid decisions? Because I was new at trading and the article I read got me so pumped up believing this would make me a HUGE profit in a few days and so I traded off my emotions.

There is nothing wrong with reading quality investment advisories, but you still need to define how and when you trade and then take the information from the advisory that you are reading and see if it lines up with your strategy. If it doesn't wait for it to or just move on to the next opportunity.

A profit is a profit as long as its a profit

Don't get greedy, but be happy with a profit no matter what the size. Any time you get out of a trade with money in you pocket is far better then getting out of a trade that cost you.

Many times a new trader will get into a trade and then see that trade move into the direction they want it to move. They will get all excited because in no time they put on a $300, $500, or $1,000 profit only to see it turn against them.

I remember when I was very new to trading. I put on a spread and within about a week I had a $3,000.00 profit. I just knew that I was going to make $10,000! But the trade moved against me and I had only a $2,500 profit. I rationalized that this was just a pullback before the big money came in, then if moved down to $1,500. Now, I could not justify closing my position because I had a $3,000 profit a few days ago and surely it will go back up. I literally staying in this position until my brokerage account forced me to close because I didn't have enough money to service the position. I then received a margin call that set me back a few grande. I literally stopped trading for about ten years because of this experience.

Monitor your positions and when you start booking profits protect those profits like they're your only daughter. You can do this in many ways, but be happy with what ever you have and don't be afraid to get out quicker then what you originally planned.

On the other side of this equation is that you don't want to consistently be getting out of positions prematurely either. You need to find the balance between taking profits and limiting losses, but don't ever make the mistake that I made of allowing your profits to turn into a looser because you can't stomach getting out.

Cut Your Losses, but Not By Too Much

Seriously! When you enter a position you can easily set a stop or an exit strategy too tight. You will find that many positions will go against you before they go for you. I'm not saying that you should go down with the ship, but you should give your position enough room to work for you.

Your initial exit strategy can be larger at first, but then get tightened as you go. I have gone into positions with my initial exit point at 25% or even 50%. After a few days I re-evaluate my exit and start moving it tighter.

If my position immediately goes the direction I had hoped I will start moving my exit point up in order to not give back my profits. If it moves strongly in my favor I may sell a percentage of my position so that I don't have as much on the table, but still have the capability of catching more profits.

If the position trades flat for several days and it doesn't seem like it is going to behave as I thought then I will move it up just in case it goes against me.

If it is bouncing around I may just continue to give it room. The key here is that you have to limit what you give away and you must be disciplined to follow the rules that you have set for yourself.

Don't be Afraid to Trade Options

If you are not familiar with options then get educated. They are a wonderful tool that can be used in many creative ways. When the market is flat they are great way to create income on stalling positions. They are also great vehicles to hedge other positions.

When you learn how to use them properly you can control your risk in a position. Many people make the mistake of over leveraging which is an error, but when use right with proper understanding of the time decay they can really change how you trade and make you a much more effective trader.

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    • Hound Cat profile image

      Hound Cat 

      6 years ago from Los Angeles area of Southern California USA

      I see you are strong on option trading as myself. My experience in the options markets have been favorable even with the risk involved. I have been getting killed in traditional trading, especially those rip off mutual funds. I much prefer to have it straight and invest in specific markets.

      These investment managers seem to be somewhere short of "Stupid!" They have lost me so much over the years especially in this current bear market. I also advise that you should not be afraid to trade in put options or in selling a stock short. Again, there is tremendous monetary opportunity in a good short position.

      A unpopular opinion of mine I would like to state as well. I really feel that putting money in a 401k is a total "fools" position. I do not know anyone who has made money in one. Maybe I just do not know the right people.

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