Two Crucial Keys for Trading

Today's guest is Chuck Hughes of Wealth Insider Alliance. Chuck is going to discuss a simple way to kill two birds with one stone in this post on risk management. Be sure to comment on this post and let us know what tricks you use.

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Does this phrase sound familiar?

"Watch the downside, and the upside will take care of itself."

That's what John Paulson's mentor and former boss, Marty Gruss, constantly drilled into his head.

Or, to put it in the words of Warren Buffett, "Rule 1: Never lose money.  Rule 2: Never forget rule No. 1."

What is the best way for you to minimize your downside and launch your success rate – and your profits – through the roof?

Actually, there are several ways… and two of them are absolutely crucial.  They defy human nature, but are absolute MUSTS for trading success.

In order to achieve success you MUST practice sound risk management by doing at least two things in particular:

  1. Closing out your losing trades before they develop into large losses.
  2. Not limiting your profits by selling winning trades with a small profit .

Sounds pretty simple and obvious, right?

Yet most traders end up doing just the opposite. Seduced by the euphoria of taking a quick 10% profit, they sell winning trades early, even though they're giving up potentially greater profits later.

Or worse, they'll sell a stock when they have a small profit but continue to hold losing stocks, eventually winding up with a portfolio of losers.

In other words, they shoot themselves in the foot – limiting their upside and letting their downside run wild.

There's a simple way to avoid falling into either of these two pitfalls, though...

Striving for a 3-to-1 profit-to-loss ratio will help to ensure your winners keep on growing, and the losers get the boot before they can take a significant bite out of your bottom line.

If you're willing to risk 7% on a trade, then you should expect a 21% profit on your winning trades in order to achieve a 3-to-1 profit-to-loss ratio. If you are willing to risk 10% on a trade, then you should expect a 30% profit on your winning trades, which can be difficult to achieve. I always think in terms of taking measured risks with every trade.

Also, if you have enough trading funds, don’t risk more than 10% of your capital on any one trade. This is important, as it spreads your risk between 10 trades and helps prevent a large portfolio loss if one of your trades experiences a big loss.

Practicing sound money management is important for your trading success, and is often overlooked in the search for finding profitable trading strategies. In my experience, risk management is just as important as trade selection.

Or, as the saying goes, 'Watch your downside, and the upside will take care of itself."

To find out more about how easy it is to achieve a 3:1 profit-to-loss ratio, and for a detailed, inside look at several of the other secrets and strategies I have for trading stocks and options, you can grab a free copy of my new, 103-page profit guide here.

Yours for life-changing profits,

Chuck Hughes
Wealth Insider Alliance

12 thoughts on “Two Crucial Keys for Trading

  1. The rules are great, but very hard to use in real world. So for me the best solution would be to buy at the right price, then "the upside will take care of itself". But how to get the right price of a stock? That's something everyone has to work to figure it all out. because no one here, or anywhere else, will or can help you.

  2. Sounds so simple yet not so simple. Imagine someone quiting a losing trade 'cos he does not want to lose much and in matter of minutes seeing the same trading reversing. Same for a losing trade. It is a very hard rule to comply with, particularly myself.

  3. Why are we constantly getting info about other sites or products?
    Is Market Club not trusting their own product and promoting others?

  4. Sorry to say, but this is one of that usless generalizations.... for those who don't know how to trade, just keep your money in fixed income.... you won't regret. The bull run we saw in the 90s and early this century is one in a lifetime opportunity, so very probably noone living these days wil encounter this opportunity again. Wanna become a trader, then trade, trade, trade ... the only way to find what is your way to succeed. Do your homework, find an edge and trade it.

  5. After forty years of trading I know all too well the pain, ah, the pain! The glory of winning is grand, but somehow that glowing feeling never lasts as long as when one is beaten down and down and down. Bummer!

    My rules and percentages are simple and should --no, MUST-- be kept in mind when trading. It is VERY difficult to separate yr emotions from your golden thinking, so watch out!

    Here are my rules:

    1. When is it time to sell? I look for a 5% decline from a technical top. Statistics show a 70% probability that once an equity drops 5%, it's likely to continue to fall further before it goes back up. If the price does not rise more than 5% past what you sold it for, don't be surprised if in a few weeks it suddenly drops more than 10% lower than what you sold it for! This is a very common pattern, IMO.

    2. Although your guardian angel's convinced you your latest pick is The One, don't bet yr life's savings on it. Scale in yr buys so that your first is say 1000 shares. IF the price moves in your favour, buy another 1000, and carry on until you have the amount you want. NEVER, NEVER, NEVER, as in NEVER put more than 10% of yr principal into any single equity or asset, and for Gawd's sake, never hang in there watching it plummet. Once it falls more than 5% you should be looking for an exit ASAP, not slowly dying in hope it will recover tomorrow.

    3. When the shares double, sell 1/2 and keep the rest as freebies. But track them just as carefully as before!

    4. Many of you will say "What the Hell's he talking about! Nothing I buy ever doubles!" If this is true, then
    A. you need to do more research and learning before you make commitments, and
    B. you can try selling at a lower level, say 10, 15, or 20%.

    Keep in mind that for this latter technique to work, you must take profits in short-term periods, and do it over and over and over again! It's true that 5% profit per month can become 60% at year end, BUT this has to happen TWELVE times. How likely is that to happen for you?

    If you lose say $40,000 before you start trading in a consistently profitable way, isn't this less than what you would have spent on a college financial education?

    All best, Joseph
    jefasciani@shaw.ca

  6. Hello!

    This fellow is very savvy and speaks the truth. After forty years of trading I know all too well what he writes of, and the pain, ah, the pain! The glory of winning is grand, but somehow that glowing feeling never lasts as long as when one is beaten down and down and down. Bummer!

    His rules and percentages are simple and should --no, MUST-- be kept in mind when trading. It is VERY difficult to separate yr emotions from your golden thinking, so watch out!

    Here are some of my rules:

    1. When is it time to sell? I look for a 5% decline from a technical top. Statistics show a 70% probability that once an equity drops 5%, it's likely to continue to fall rather than go back up. If you're mistaken and the price does not rise more than 5% past what you sold it for, don't be surprised if in a few weeks it suddenly drops more than 10% lower than what you sold it for! This is a very common pattern, IMO.

    2. Although your guardian angel's convinced you your latest pick is the One, don't bet yr life's savings on it. Scale in yr buys so that your first is say 1000 shares. When the price moves in your favour, buy another 1000, and carry on until you have the amount you want. NEVER, NEVER, NEVER, as in NEVER put more than 10% of yr principal into any single equity or asset, and for Gawd's sake, never hang in there watching it plummet. Once it falls more than 5% you should be looking for an exit ASAP, not slowly dying in hope it will recover tomorrow.

    3. When the shares double, sell 1/2 and keep the rest as freebies. But track them just as carefully as before!

    4. Many of you will say "What the Hell's he talking about! Nothing I buy ever doubles!" If this is true, then A. you need to do more research and learning before you make commitments, and B. you can try selling at a lower level, say 10, 15, or 20%. But keep in mind that for this latter technique to work, you must take profits in a short-term period, and do it over and over and over again!

  7. Could you write a condensed version of your 103-page profit guide?
    Most of us in Silicon Valley do not have the time to read through a long report.
    Thank you.

  8. Hello guys,

    I have 1 question for you. I mean do somebody is a full time trader who benefit from trades enough that do no need to work on regular job as for main sourse of income?

    Thank you so much.
    Looking forward for your respond, Please respond me.

    Vika

  9. I agree that risk management is very important in any trading strategy. I would have thought however that anyone advocating risking 10% on a single trade is gambling not trading. The maxim of no more than 2% potential loss on a trade ensures you can trade another day. At 10% you are only a further 9 trades from oblivion. Surely it doesn't matter whether you have a $1,000 account or a $100,000 account sensible money management is always the key to longevity.

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