Quality Trades vs Quantity Trades

Q-vs-QWhen I began trading for the first time, I didn’t know what quality trades were, like many other traders. We hear that we should go the the Top Gapper list of our scanners and trade whatever is hot at the moment. Don’t have me misunderstood, there is nothing wrong with looking at the Top Gapper list because i love that list. However, as a new trader we are often not taught how to decide which stocks out of that scanner list, or any scanner list, is worth trading and which ones are pure garbage.

This led to me over-trading because I was not excluded any stocks based on any criteria that I had set for myself. I didn’t have a list of requirements a stock had to meet before i decided to trade it, or even consider trading it. This led to some good trades on some stocks, but terrible trades on other stocks. To the point where if those same opportunities came my way right this moment, i would ignore 75% of those stocks i was trading as a beginner.

I believe some of the major reasons why a lot of traders don’t necessarily focus on quality trades are..

#1) Quality trades are often seen as boring. When new traders think of quality trades they often think of  stocks like AMZN,GOOG,TWTR, for example. What I mean by quality trades, are trades you take on stocks that have

A) Good Volume (To be able to buy and sell quickly and easily)

B) Tight Spread (Where the bid price and the ask price are only a 1-5 penny difference

C) Good Chart Pattern/Uptrend/Downtrend/ Dip Etc

D) Good Fundamentals (Making sure the stock most likely won’t go bankrupt overnight or lose 25% of its value due to an offering for example)

E) Good Float Size ( I typically don’t like huge float because of how much volume they require to put in decent sized moves)

F) Good Daily Trading Range ( Trading with a range of , for example, $2 vs trading a range of $.20 cents

Those are just some examples. There are more points you can make to choose your own requirements

#2) It takes time to actually look and find stocks that meet your criteria, ahead of time. This is another big reason why people don’t choose quality stocks to trade. Its much easier to get out of bed and open your laptop at 9:15 Am and try and trade what you you’re most likely unprepared for. However, doing this doesn’t mean you will be profitable, in fact I believe it will decrease your chance of being profitable. The best traders I know routinely do night scans to try and prepare for the next day. This gives them the advantage because they are looking at setups they assume will be in play the next day. This way, you don’t have to go scrambling for stocks to trade. You can sit back, relax, and let your trades come to you. But, thats not all..

#3) Trading quality stocks is not just about the stock, its about having a quality plan as well. Not only do those professional traders do nightly scans, but they have a plan in place so that they are prepared the next morning if one one of there stock picks move in their favor. Think about how much easier it is to see a stock in the morning moving in the direction that you want , and you put a plan in place the night before. Its like you playing on a basketball team with all random guys, no chemistry, no roles. Opposed to you playing on a team where everyone knows there role, you have studied the plays, and you are familiar with each other. Guess who has the higher chance of winning?

 

Cutting Losses Quickly, and why it can be so difficult

4In stock trading we often here that we should cut our losses when the trade that we’re in doesn’t go in our favor and turns against us. This makes plenty of sense especially if you understand that this also aids in keeping your overall P@L higher by giving you a respectable average loss number lower than your average win number.

Now, this seems easy on paper, so why do so many beginner traders have difficulty applying this method? There are 3 main reasons we find that is often the source of why some traders find it so difficult to cut losses quickly.

#1). Not using stop loss. This is simply the number 1 reason we find as to why a lot of traders find difficulty in cutting losses quickly. When you trade with a stop loss, you are often subject to unplanned actions during the trade. For example, Someone who never uses a stop loss often says things like “I will get out when the price is at $10 per share. When it gets to that $10 per share they often adjust that mental stop loss by thinking ” Maybe ill get out at $9.80″. This happens far to often and often because the trader is focused on hoping the stock will return to whatever price he/she wishes. Instead they should be focusing on picking a stop, setting a stop, and RESPECTING  THE STOP.

This leads to

#2) Not being disciplined/ Sticking to your rules. There are those who do use stop losses but adjust there stop to give the stock another chance because they are hoping the stock rises back in there favor. When you do this over time, all that the trader is allowing is for bigger losses. Once a trade stops working in your favor you should move on. This is why some of the better, more experienced traders will often cut there losses even before there stop loss gets hit. They do not need to let the price go lower to meet there stop if there are already signals telling them that the trade is no longer working. I have a personal example of this.

I use to skip the option to use stop losses at all and went with the “I will get out with the mental stop” mentality. After I went through every single trade I made and recorded the profits and loss from each trade. It concluded that instead of being down close to $2,000 at the time, I would have only been down $200+happening if I had cut my losses at 4% each trade that I lost money. Now i personally don’t believe in a strict percentage number to cut losses because I would rather have a range (I will talk about that range in reason #3), but it just puts into perspective of how much you can lose if you don’t manage the trade properly.

#3) Not knowing what is an appropriate cut off price/percentage. There is a problem with both ends of this dilemma. One is setting stops too tight, the other is setting them too far. I’ve seen people who say “I cut all my losses at 3%”. This can be good and bad. Its good because your losses will be relatively small overall. The bad part is you will probably be getting stopped out left and right. Especially dealing with volatile stocks, in order to make money consistently on the them you must allow them to move first. If your stop is too tight at first , then you will often get taken out of the trade only to see the stock do exactly what you expected. The opposite to this is when people put there stops way too low. So low that there might as well be no stop loss to begin with. The method I was is one a learned from a professional trader and is used my many types of traders. I simply put my stop loss at relatively close, maybe 5%-7% of capital risk. The whole point is to give the stock room to move, but as the stock moves in my favor, I adjust my stop closer to my entry. The further the stock goes in my favor, the more I adjust it. Once the stop loss is at my entry(or a little higher to cover commissions) I am stress free knowing i wont lose any money on this trade. Even as it continues to go higher, keep adjusting the stop, but not too close. Still give it room. When the stock doesn’t go in my favor, depending on what it is doing , I will adjust the stop to cut the loss sooner instead of letting it hit the stop all together .

 

 

The #1 Thing New Investors Don’t Focus On

bigstock-Stealing-a-purse-through-a-lap-56186603-900x444When we all begin dreaming trading or investing, we are almost all guilty of thinking about the Ferrari, the mansion, the women, the recognition etc. There is nothing misguided about those hopes and thoughts. However, as a beginner trader it does have the potential to be dangerous for a number of reasons.

One reason it can be dangerous is because those thoughts can be used against us. You and I have seen “Trading Gurus” or “Business Gurus” all over the internet and time and time again they try to catch our attention not by showing us trading, but by parading our dream cars with women on top of them parked in front of houses we envision being in. Showing dream vacations and travelling, and mind you, even that is not the real problem. The problem is the intent. Most of those people are not simply showing you because they believe ” You can do it to”. Its more like ” You can do this too…if you buy my course.”  “You can do this too…if you join my chat room.”  “You can do this too….if you pay to attend my seminar.” Long story short you have a great chance of spending for a high priced subscription or course that in reality, you can often find online for free. Now, that isn’t to say that there isn’t great chat rooms and stock trading courses or business courses, but be skeptical of the ones that are trying to entice you with shiny things more than talking about the actual process.

While that is one that beginner traders often don’t notice, that is not the number #1 thing they don’t focus on.

The number 1 thing most beginner traders don’t focus on is Protecting Capital vs Making Money.  Now at first many may think “what, i thought i was here to make money”. Correct, we are all here to make money at the end of the day, but are main priority when putting on live trades is how can i protect the money that i have at risk FIRST. Instead we often think the opposite, ” OH Man, i could make $400 dollars on this trade”. The reason why this is important is if you use the mindset of protecting your capital first, you automatically start using more risk tolerant strategies. I will give an example:

When I was focused on how much money I could make first, i often didn’t use stop losses, I continued to adjust my mental stop so that i could give the stock more room to hopefully rise back in my favor.  What ended up happening was an initial risk of what was suppose to be $40 dollars would now be a $85 dollar loss

VS

When I was focused on how to protect the money I had risked and also reduce my risk, I always remembered to use a stop loss. I once forgot to put a stop loss in but because i was focused on protecting my money, I immediately got out, even though the stock was moving in my favor. I would also actively remember to adjust my stop closer to my entry point as a stock would go in my favor, which reduced the risk even more. By the time my stop loss is at my entry, a huge weight was lifted off my shoulder and i could now let the stock move with me worried about losing money , which is a very comfortable position to be in.