In a restaurant, we try new dishes by looking around at what other people are eating 🙂 One of those discoveries is the Pho – a Vietnamese soup consisting of very thin slices of raw beef topping off oodles of rice noodles which is cooked by the steaming hot herb-flavoured soup. It usually comes with a separate plate of bean sprouts, basil leaves and a slice of lemon. We’d munch on the crunchy bean sprouts while waiting for the rest of the food and usually finish with the basil which leaves a fresh taste in the mouth. (Not sure the lemon is needed in the soup but it would magically reappear in my kitchen for some other practical use). 🙂 This has been going on for some time when I came across an article that says there is a whole ritual with this separate plate of accompaniments. Anyway, bottomline, for me, the Pho dish must have the beef, the soup and the noodles. It wouldn’t be a Pho without these 3.
My No-Fuss Trading System
In the same vein, I discovered that my trading performance went from Loser to Winner particularly with 3 Numbers which is the heart of my Trading System — I put them together from the discussion in the brilliant book by Dr. Van Tharp “Trade Your Way to Financial Freedom”.
- First Number is “1”
This relates to the STOP – in Trading like in life, you need to set limits. Think Alcohol, speed limits, food intake. I love the STOP because it lets you stay in control of your losses (controlling tendencies put to good use!). 🙂 In Trading, this is the maximum amount you are willing to Risk. Let’s call this our 1R (1 x Risk). I find it best to relate this amount to how much Capital you have, for example Capital is $10,000 and 1% of 10,000 = $100. This amount is not what you will use to trade, but is the amount you are willing to Risk.
For example, buy 300 shares of $5 each = $1,500. But you set the “maximum amount you are willing to risk” at $100. Calculate how much you can afford to lose per share with your $100 Risk money ($100/300 = 33c per share). So if the share price moves down in which you lose 33cents of the $5, you limit your loss and left with $4.67 and close the trade so you only lose $100. (For simplicity we exclude broker’s fees)
You set your Stop at the amount that does not worry you if you lose it, but also allow you elbow room for the trade to move in your favour. Once you set this limit, respect it. In each and every trade. Alright,,, too hard? How about making this a habit and for every 3 trades you close at your STOP, give yourself a special treat… (this usually works with the kids.)
I also use this for my Position SizingTM . Yes, most of the time I enter a trade with my maximum loss – which I can do with Options Buying strategies.
- Second Number is “3”
This relates to ENTRY –only ever enter a trade if you can make 3 times your money.
So in the example above, if your 1R is $100, ensure you trade only the opportunitythat will give you 3R or $300 profit. That will make you more selective so you use your money for trades that are profitable enough to cover your costs and reward you for your efforts and time.
This is where women’s carefully honed judgement in Shopping is most beneficial. In Shopping, we do need to look around a lot and take the time. When we do, we are rewarded with a dress or shoe that is most flattering and able to wear a lot. Any hurried purchase usually disappoints. Same in Trading. See that? Shopping skills can earn you money (for more shopping! Yeyyy!)
- Third Number is “4”
For taking profits or “Profit-taking EXITs” it is best to use simple ideas which you then use together.
I use these 4 exits:
TIME — estimate when you think the position will be profitable, this could be in 3 days or 1 week or 1 month. Otherwise, you could suddenly decide to be a “long-term investor” and stray from your Objective or possibly lose more money.
PSYCHOLOGICAL – when you’ve got a trade open but something in your mind muddles your thinking, take your profits. This could be a relationship issue, moving house, new child or going on a holiday. And when on holiday, be on holiday. It pays to relax and have fun. (Seems to be a problem with men butnot for women!)
TARGET – set a target at which you will close the trade and get profits. A target 3 times your initial Risk or 3R is recommended.
TIGHTEN – as market is moving in your favor, let the profits run but have a way to tighten your hold on your profit.For example your 1R = $100 if your trade has “floating profits” of $500 at the Highest point but started slipping to $450 (or 10% off the High), take your profits at this point. You wouldn’t want to give away too much profit, this is valuable shopping money we are talking about! 🙂
Every Trader should have a set of Trading Rules to follow in every Trade. They should fit your unique situation, especially the Risk you are willing to take (your 1R). For discussion of other Entries, Exits and Stops look up the website www.highheeledtraders.com
Remember my 3 main ingredients for a Winning Trade – “1R Stop, 3R Entry, 4 Exits”.