Glenn Stok writes about investment and risk-control strategies that he has perfected during 45 years trading stocks, options, and futures.
I have been investing in stocks for 45 years. During that time, I made a lot of mistakes, but each time I blundered, I learned something. Those lessons helped me develop strategies for a high probability of success. Now I can share these lessons with you.
Begin by Planning Your Entry Point
You need to have a rule for when you buy and when you sell. Don’t just buy a stock when you discover it, and you think it might be an excellent addition to your portfolio. You need to do some research to decide what price is right for getting in.
Don’t be afraid of missing out, thinking that it will go up from there, and you’d have to pay more if you had waited. There is only a 50% chance of going up. It took me decades of trading to finally learn that.
Stock prices can only go up or down. Therefore, it’s always a 50/50 chance either way. So be patient when getting in. Stocks also fluctuate throughout the day, so if you are sure you want it now, right now, then at least put a limit order in a little lower than the trading price.
Better yet, examine the daily chart and see how much it’s been fluctuating in the past few hours. That will help you judge where to place your bid for the limit order.
Sometime later in the day, your order might be filled, and you’ll be happy you got a better deal than if you went in right away.
Plan Your Exit Strategy
You should plan an exit strategy before you get into a trade. You need to plan what conditions you will accept. Do you want to make a hundred bucks—or a thousand? What about a loss? Are you willing to lose $100?
Are you willing to ride it all the way down if that’s the direction it will go?
I once held on to a stock until the company went bankrupt, and the stock went to zero. I kept telling myself that I lost so much that I’d wait for it to rebound. But I just kept losing more.
The trick is to have the courage to admit when you’re wrong and get the hell out!
The method that I finally learned to follow is to decide how much you are willing to lose. If you reach that level, admit you were wrong and sell. You’ll have succeeded with holding on to your money to use for another investment later.
I remember times when I’d stay with a losing stock while watching another take off like a rocket. If only I sold the underperforming one, and put those funds in the other stock. Who knew?
I’ll tell you who knew. I did. I had a loss on a trade that was greater than the amount I was comfortable losing. Because of that, I wanted to get my money back, so I waited.
That is NOT the correct strategy!
I knew I was sitting on a loss. If I would have closed that trade and taken the loss, I would have possibly moved the funds to a better performing investment.
Learn to admit when you’re wrong and save your money for another day. It gets easy to do that after a while. Maybe you need to lose your shirt a few times before you get the hang of it. Try not to let that happen too often.
The best strategy is to plan ahead of time how much you are willing to lose on any trade. Then place a stop order as soon as you entered the trade.
Moreover, don’t change the stop price later. I found that whenever I modified a strategy midstream, I screwed up the process. Believe me, you’re more right at the beginning when you're clear-headed because you're not yet involved in the trade.
Emotional thoughts are never precise. When you make changes later out of greed, or fear of loss, you're doing it for the wrong reason. Leave it alone and let the trade work as originally planned.
Take Your Profits Early
I asked you earlier if you knew how much profit you wanted. A hundred bucks? A thousand?
It’s crucial to have an idea of this and take it when you reach it. When you close a trade your money is free to do another. It’s better not to be greedy—hoping for more. Plan what profit you want, and take it when it’s reached.
If only I had done that throughout my life. I often had a trade where I was sitting on a nice gain and lost it. I was picking the right stocks, but I didn't take profits when I had them.
I remember thinking it was so easy and I was on a roll, and I thought it would continue.
Hey! Remember what I said earlier—stock prices only have a 50% chance of going in any direction. Never forget that, especially when you have a reasonable profit. Don’t let greed make you to wait for more, and cause you to lose the gain you had.
There are two ways to handle this:
- You can take all the profit and close the entire trade.
- You can sell a portion of it and let the rest ride. That works too.
If you are lucky enough to have doubled your money, and you think the stock still has a reason to move higher, then you might want to take half off the table. The other half is “found money,” and you can afford to lose the entire thing if the trend reverses.
Keep a Journal and Learn From Your Mistakes
Keeping a journal of your activity is a great way to learn from your mistakes. It’s truly a goldmine.
I learned a lot from reviewing my past activity and noticing what I did wrong when I lost, and what I did right when things worked for me. That knowledge gave me the ability to repeat the patterns that worked.
Unfortunately, I also kept repeating bad behavior. You know the old saying, "The sign of insanity is when you keep repeating the same activity even though it fails." I guess I must be insane!
Keep a record of all your successes and failures. That will help show you what has been working for you, as well as what went wrong and why. Knowing why things went wrong will help you avoid making the same mistakes again.
Try to keep some sanity in your behavior. We tend to want to try failing methods a few times before we accept the fact that there has to be a better way. The sooner you give up on those hopeless tendencies, the better.
Use One-Cancels-Other (OCO) Orders
Make the entire strategy mechanical, so your emotions don’t force you to change your strategy midstream. Mechanical trading eliminates the adverse effects of emotional trading.1
If your broker allows OCO trades, use it. You can set a closing trade to execute with a specific gain and with a stop-loss at the same time.
Whichever occurs first gets executed, and the other is canceled. Stock prices don’t go up and down at the same time. Therefore, you either take your profit when you have it, or you mechanically limit your loss without the interference of emotion.
Plan how much you are willing to risk, and set the stop-loss accordingly. In addition, take advantage of the OCO order entry by including a limit order at the price that gives you the gain you’d be happy taking.
Explanation of Mechanical Trading
Mechanical trading eliminates the problem with your emotions getting in the way. When you make everything automated, you will not allow your emotional feelings to change your plan.
I know when I leave it to decide later, my emotions always mess me up. I double think it and usually make the worst move.
If you have a gain and you take it, it’s a sure thing. If you have a loss and you cut it, you certainly limit your portfolio from getting any worse.
You end up making any profits a reality, but you also limit your losses if it goes against you. I think that’s a win-win situation by any means!
Considerations for Exiting With a Gain
Some people feel they don’t want to sell a stock with a substantial gain because they’ll have to pay taxes on it. They know that if they hold it longer than a year, the long-term gain is taxed more favorably—at least here in America.
I’ve had experience holding on to significant gains only to lose most of it when the stock gave it all back.
In my opinion, I would say not to worry about paying taxes. You still keep most of your money. You might give it all back if you hold on. Remember the other option I mentioned earlier. You can sell a portion of a trade.
Maintain Equivalent Position Sizes
I made the mistake of increasing my investments in specific stocks that were doing exceptionally well. But I didn’t add to my under-performing holdings at the same time.
What ended up happening too many times to mention, the good stock turned around. Since I increased my investment, I ended up losing a great deal more than I would have if I kept my entire holdings balanced.
So, here’s my strategy for this:
Figure out how large a position you need to make the gain you want, while risking only what you can afford to lose.
Keep all your positions the same size. You never know when you will be right or wrong. If you double up on one trade, compared to another, you might just end up doubling up on a bad investment and therefore doubling your losses.
If you keep all your trades the same size, and if you follow the rules for the high probability strategy that I discussed so far, you could have a good chance of doing better than the average investor.
I’m going to go against my prior strategy now. I was making it clear how I felt about taking profits when you have it.
There are two other methods, day-trading and long-term investing.
Day trading has enormous risks, and I don’t recommend it. Been there, tried it.2
There is another situation to consider that has enormous potential. If you are young and have time to let things grow, long-term investing can be a game-changer for your retirement years. Of course, that all depends on the type of stocks you hold all that time.
Notice that I call that “investing” rather than "trading." I believe in that! It’s a strategy that has been proven to work in most cases if you have the time for it going forward.
I’m not going to give you any advice on stocks in which to invest. That is not the point of this article, and it is not my business to tell you where to put your hard-earned money.
Long-term success requires picking the right stocks, picking the right direction, and picking the right timing.
If you pick the right stocks and don't let your emotions keep making you change your mind, then you might do very well in the long run. I remember the DOW being around 800 when I first began trading on the market. Now it’s above 29,000.
You still want to cut your losses even if your goal is a life-long investment, so you always will find yourself trading in and out somewhat. However, don’t let emotion guide you.
Fear and emotion are two things that make long-term trading fail. People who don't look at their holdings for 30 years or so, are usually surprised to discover they are millionaires in the end. But that’s rare, and true only if they had chosen the right stocks.
Other things can go wrong, such as war or other catastrophes.
Once you achieve a history of trading success, you’ll have realized a certain amount of knowledge and experience that you can use to control your behavior. That will help you maintain these high probability strategies.
- How to Stop Emotional Stock Trading by Trading Mechanically – ToughNickel.com
- Day Trading Stocks and the Risks I’ve Learned to Avoid – ToughNickel.com
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Glenn Stok
Glenn Stok (author) from Long Island, NY on January 23, 2020:
Ken Burgess - You summarized it well. You can protect yourself when shorting a stock, same in reverse, by placing a stop order to buy it back if it goes up beyond your loss threshold.
Ken Burgess from Florida on January 23, 2020:
Good article, what I have learned:
Don't put your money into a stock/company you don't feel confident will eventually go up past your buy point.
Do your research, and be willing to hold onto it for a while if necessary.
Don't margin to hold, don't margin if you can't take the loss when you get out.
Don't short a stock you don't have stake in, most will lose more often than they gain, its a game for people who can take a big loss.
Glenn Stok (author) from Long Island, NY on January 23, 2020:
Liz Westwood - Many strategies exist that people experiment with, but the most crucial one, in my opinion, is controlling risk.
Liz Westwood from UK on January 23, 2020:
The stock market has long been a mystery for me. Thanks for sharing the tips you have picked up from experience to help novices like me. This article gives a good insight into how the system works and how to make the most of it.
Glenn Stok (author) from Long Island, NY on January 22, 2020:
Pamela Oglesby - Your story about your Mom's and your investment is not unusual. I know a several people who bought a good stock at the right time when it was depressed, and didn’t play with it afterward. They just let it grow.
Glenn Stok (author) from Long Island, NY on January 22, 2020:
Angelo - Thanks for the complement. Avoid the pitfalls and the successes will multiply.
Pamela Oglesby from Sunny Florida on January 22, 2020:
My mother and I put $1000 into Lowe's stock several years ago when the housing market was not good. We made over $4000 in just a few years. This was beginners luck for sure.
I think you gave us some solid advice for investing. I am not at an age where I want to risk money, so any investments now would be very conservative. This is a good article for those just beginning to invest for sure.
Angelo from College Park, MD on January 22, 2020:
Genius man, thanks for sharing I'll follow intensely in hopes of enjoying your successes while also avoiding those pitfalls.