Trading Rules, Systems and Processes

Trading Rules, Systems, and Process are employed to help us detach from distracting outside influences. At tops we can get recklessly over confident, and at bottoms fearfully paralysed, and then the desire to override a system can become compelling. Be Brave.

No trading systems are perfect but the good ones make money overtime so there is a level of acceptance, understanding and a realistic contribution from you that we need to comply to succeed. After all we never know what’s going to happen next and are often surprised. Why second guess?

Covid the GFC! Many missed the early signals for a simple reason – fear and the need to override. This nearly cost Jesse Livermore, one of the smartest stock traders, his entire ‘pot of gold’. Every now and then we think we can be smarter. My experience tells me not.

All good traders have rules to live by

So, the next question is how? In a word discipline. That’s something easily said but not something easily achieved. You’ve either got it, or you haven’t. Know thyself. The street is littered with fallen soldiers who have tried and failed. Make no mistake this is not easy unless you can act and behave like a robot that doesn’t ‘feel’. We all ‘feel’ and that’s what makes it so hard and something we need to put to one side.

With the greatest of intentions, we want to trade and follow the rules, systems, and processes because we know that is the best way to make money. But we are human, we have feelings, and we don’t like losing money. The cycle can break down. So, this leaves us with a mismatch between what we want to do and what we have to do. How do we find a way around it? There is no answer to that question as all I can do is tell and show you, but I can’t do it for you. That’s the difficult task you take on when you invest in the stock market.

After the current pullback from the highs (Aug 21) some portfolio members started not taking signals, nerves, I understand but it is the incorrect way to run a system because it’s at these points you really need a system because emotions are at a peak and your ‘decisions’ will inevitably be wrong. You will likely miss out as they do. So, of 10 of new portfolio members 50% will learn and adapt, do well and make money. No matter what you think the market does not care. I get a lot of members but lose some because of that inability to follow the system. Frustrating for sure but slowly they learn, adapt and employ the disciplined techniques required. So just as the stock market is repetitive so too are the traders and investors and that simply explains why the market is so repetitive in its nature.

Historically we take losses as we did with Covid, but the bounce back was extraordinary, surprising to everybody, incredibly lucrative, and more than covered the losses inflicted by the sudden sharp fall. Losses are a part of the game. We use only weekly signals, and, in that space, you need a good 5 years of market action to accurately assess. Who said this game was easy. It is a test and a challenge to you as a person.

That’s how it works as we all know, but still we can’t do because we can suddenly doubt a process that has worked for years. So sometimes we fight ourselves.

This is what happens. We get nervous at bottoms, not that we know it is a bottom at the time, if only, and this is when we need the power of self-discipline. It’s when we need to strong that’s best done with guidance from a systematic process. Yes, there are always losses – part of the game. Also, part of the game is doing what we don’t want to do when we should. It’s not easy but that’s the reality.

Those that can follow a soundly based system with historical supporting evidence will always do best. Don’t second guess. I see it every day amongst the portfolio subscriber cohort. Yes, it frustrates me. I quickly know who will do well, and who won’t. I’ll leave it there for now, but you get my gist. Are you in or out, it’s up to you.

A word on allocation when trading our portfolio’s. This is one of the many risk controls we employ as we chip away at the losses we must endure. That’s why we limit them. We know we’re going to take them so let’s not let them get big. Recovering from a loss of 30% doesn’t require a win of 30% to get it back, with the money you have left you have to make 42.9% to recover and that gets exponentially larger the more you lose. Don’t lose big, we choose 15% as the loss limit on any one trade.

Back to capital allocation to a trade.

A 5-stock portfolio has $1,000,000 capital. Divide by 5 to get your buy allocation of $200,000 for the next trade.

If the portfolio shrinks to $900,000. Divide by 5 to get a buy allocation of $180,000.

If the portfolio grows to $1,100,000. Divide by 5 to get a buy allocation of $220,000.

At every angle we are trying to manage risk and cost.

On occasions you may miss or decide not to take a signal, your choice and that’s ok but take responsibility for it and don’t overlay your opinions too often. Keep taking those signals to make the process work.

My job is to educate, your job is to DO – the best you can. You will know when you’ve made a mistake! Try to learn from and eradicate those mistakes and accountability is a good tool to employ. We can kid ourselves but not someone else. Trading on an island is unlikely to attract success.

We are now in that market ‘testing’ time as we drop 15% from the August 2021 high. We‘ve taken some losses and some members will have started portfolios at the peak of the market and that’s the way it is because we know now, what we didn’t know then.  But we can’t know and that’s why we need time to assess a strategy over time. Inevitably we want to take all signals and more at the top of the market because we are making money lots of money and it makes us feel invincible and reckless, just as at the bottom fear can envelop us and paralyse us. Fight it hard.

There are many other common-sense boundaries, rules and processes that control a portfolio of stocks. They are all designed to keep risk low and at every angle chip away at those costs. There are many aspects too managing and running a portfolio of stocks that grows your equity. Simply managing your own portfolio of stocks can save you a lot of money.

So, there is work to be done, and it doesn’t come easily but I am here to guide and help but you must be able to do! You can see my charts and results every day but there is a part for you to play it won’t just happen unless……

My brand is honesty, transparency, and simplicity and that can be tough sometimes for me as a commercial enterprise. But my passion is for you to succeed and for me to teach the right principles. The rest is up to you.