Jay’s Trading Maxim #72: The purpose of a stop-loss order is not to maximize your profitability. As a wise (and grizzled) old trader once said, “The sole purpose of a stop-loss order is to save your sorry assets.”
Jay’s Trading Maxim #73: A great trade does not make you a genius. An awful trade does not make you a moron (granted you could still be a moron, just not based solely on that awful trade).
(See also Jay’s Trading Maxim’s (Part 1))
In other words, being spectacularly wrong about any trade (assuming you properly manage your trade and thus do not lose your shirt) should essentially be meaningless in the long run. Think about that for a moment. When the average investor puts on a position he or she suddenly turns into a person in the stands at the race track, ticket in hand, rooting for his or her horse to perform well. They experience elation when they win and disappointment when they lose. Which leads right to:
Jay’s Trading Maxim #74: The market does not care about you or what you think or what you want. It doesn’t care what you hold, whether you are long or short or how much you really want this one to be a winner. It’s not about you. So get over yourself. So forget all of the mental and emotional gymnastics. Focus on the cold, hard reality of what really matters, as clearly stated in:
Jay’s Trading Maxim #75: Investing is not so much about “right or wrong” as it is about “how much” and “how often.”
In other words, the keys are to make a lot when you win, lose only a little when you lose, or if you can’t do that, win a very high percentage of the time. Which is nicely summarized in:
Jay’s Trading Maxim #76: Investment success or failure comes down to simply this – (# of winners divided by # losers) times (average winning trade divided by average losing trade). The bigger this number then more money you make. So focus your efforts on maximizing these numbers.
Jay’s Trading Maxim #77: Moving averages are most useful not as “precision timing” tools, but rather as “perspective” tools.
Jay’s Trading Maxim #78: To invest your money in a good idea is wise. To invest your ego in any position, not so much.
Jay’s Trading Maxim #79: When it comes to momentum plays, enjoy the ride but never forget that the ride can end abruptly (so always keep an eye on the exits).
And if you find yourself entering a momentum play all the while saying, “I’ll figure out when to get out when the time comes”, please remember:
Jay’s Trading Maxim #82: Investors who “fly by the seat of their pants” so to speak, ultimately experience “backside heat discomfort”, so to speak, and spend a lot of time being unable to “sit down”, so to speak.
Jay’s Trading Maxim #101: Beware the trap door at the top of the escalator.
Or, if you prefer:
Jay’s Trading Maxim #102: What goes up runs the risk of coming down – really hard.
So the easier the ride and the more comfortable you become on the way up, the more – not less – fearful you should be of what may follow.
Jay Trading Maxim #107: Writing covered calls is like finding free money. Except when it’s not.
Jay’s Trading Maxim #108: Traders who have a proclivity for “betting the ranch” – so to speak – invariably end up “renting a small apartment” – so to speak.
(See also A Blow off Buying Panic in GLD and TLT?)
Jay’s Trading Maxim #112: In the financial markets, too much knowledge can be a dangerous thing – especially if it is the direct result of too much thinking.
Jay Trading Maxim #113: Go ahead and pick a bottom if you feel the urge – but don’t be stupid about it and do not – I repeat DO NOT – “bet the ranch.”
Jay’s Trading Maxim #115: The greatest thing about trading options (“there are so many possibilities”) is also – ironically – the very worst thing about trading options (“there are so many possibilities”).
Jay’s Trading Maxim #146: Circular System Logic: If you are going to follow a system precisely, make sure it’s a pretty good system. And if your system is pretty good you should follow it precisely (HINT: It’s not as easy as it sounds).
Jay’s Trading Maxim #176: Price above moving average – good. Price below moving average – bad.
Which I think sums it up pretty well.
Jay’s Trading Maxim #177: If you had to choose, in the long run you are better off with an attitude that states that “every trade is just as meaningless as every other trade” than you are thinking that every trade is going to “be the big one.”
While a very strong wind may get your boat to shore more quickly, there is also a much greater risk of an adverse event. Given a choice, a sailor will typically prefer relatively calm seas to a full force gale. For most of us the same is true in trading. In a nutshell, if you approach each trade as “just another day in the office” so to speak, you reduce the tendency to become emotionally attached to a given position or market outlook.
Jay’s Trading Maxim #187: Tis a far better thing to say “I got out before I lost my shirt” than to have to say “I lost my shirt because I wanted to be proven right.”
So what’s the alternative? As dispassionate an approach to investing as possible.