Getting Back in the Game: A Guide for Stock Traders

“Every time you quit, someone else gets your prize.” – Robert Kiyosaki

Those that love the game of football are accustomed to dealing with the injuries that often occur on the gridiron. While there are some injuries that prove to be season- and even career-ending injuries, most football players fight through the constant barrage of injuries that occur during the course of a season. Some of the stories of these struggles through injury have become part of football lore.

In 1979, Jack Youngblood broke a leg in a playoff game. Not only did he finish and help the Rams win that playoff game, but played in two additional playoff games as he helped lead the Rams to a Super Bowl appearance. Ronnie Lott crushed a finger so badly in a playoff game that it had to later be amputated, but he stayed in the game. When he played for Marhsall, Byron Leftwich broke his shin and after each play had to have two offensive linemen carry him down the field, but he refused to quit on his team. One may question the wisdom of these players staying on the field, but it is hard to not admire their determination.

While stock traders do not run the risk of physical injury staring at a computer screen, there are many traders who have sent themselves to the sidelines unnecessarily. These traders have put themselves in a self-imposed exile, unwilling to participate in the trader game any longer due to a lack of confidence or an unwillingness to put their capital at risk. Unlike football players who at times cannot physically overcome their injuries, traders have it within themselves to overcome the mental roadblocks that are preventing them from getting back in the game. It simply is a choice and unfortunately too many traders make the choice that they simply do not want to play any longer.

Perhaps you find yourself in this situation. You may have taken a class, read a book, studied charts, and taken the initial steps to acquire the education you need to become a successful trader. You might have even started to make live trades before you decided to stop trading. You might have told yourself that you were simply taking a break, or that you would start to trade again once a certain event in your life happened. The end result was the same as you joined a large percentage of traders who simply watch from the sidelines.

Five Steps to Get Back in the Game

A popular statistic to throw around regarding trading is that somewhere between 90-95% of traders fail. Whatever the actual percentage is, it is noteworthy that a large percentage of traders eventually exit trading. In last month’s article some of the most common reasons traders fail were discussed. If you are new to trading, then it is a helpful exercise to examine why others have failed so you can avoid a similar path. If you have quit trading, and become yet another statistic in the process, then it might be time to examine why you quit and start preparing to reenter the game.

Whatever reason led you to taking yourself out of the game, reentering the trading game can be a simple process if you let it be. You simply need to take a few steps that can get your mind thinking about trading. Once you do that, the natural excitement that drew you to trading in the first place will take hold. Here is a five-step guide to help you restart your trading engine and help get you get on track to become the trader you were meant to become.

Step One – Look At the Clock

You might look at the clock and see that it is 3:32 in the afternoon, 8:13 in the morning, or 11:47 at night. Whatever time you see on the clock, come to the realization that you are in this moment right now. There is not a single thing you can do about the trading mistakes you have made in the past, nor the amount of time that you might have previously wasted. You might have made some of the dumbest trading decisions in the history of mankind. None of that matters now. Resolve that at this moment, whatever time it might be, is the moment that you restarted your journey to trading success.

Step Two – Read a Market Recap

Some people heavily incorporate the news into their trading and some do not. However you use the news in your trading, take the time right now to read a market recap and then start doing this every day. Reading about the market, especially after some time off, can help get your mind thinking about trading again. If you make a habit of it every night or every morning, then you will put yourself in a position where trading starts becoming ingrained in your thought process.

Step Three – Analyze a Chart

For many traders who quit, the thought of fully picking up where they left off can feel overwhelming. If you aren’t willing to dive into the deep end of the pool, then simply start by putting one stock on your watch list and fully analyze that chart. Do this each day for five days until you have five stocks on your watch list. After you have five stocks on your watch list then as part of your daily routine examine the technical signals produced for these five stocks each day. If you do this each day then you can slowly start expanding your watch list as you see fit.

Step Four – Revisit Your Trading Rules and Guidelines

 This exercise can help instill a tremendous amount of confidence as you may realize the strengths you previously had as a trader and help you identify fixable weaknesses. After some time away from trading, you are in a position to reexamine your trading rules and guidelines with a level of perspective you might not have had before. Were some rules missing and did this cause you to quit trading? What previous rules were you diligent on? Which ones need refining? This is an excellent opportunity to fine-tune your rules before you get fully engaged in trading.

Step Five – Place a Live Trade

Once you get a proper technical signal that follows your trading guidelines, execute a live trade. If you obtained the proper education before you quit, then placing a live trade will help ensure that your initial momentum through the other steps continues. Virtual trading can be a substitute if you feel rusty on your chart reading skills. Regardless of whether the trade is successful, getting that first properly executed trade out of the way is a critical step to reentering the game.

There is no reason for you to sit on the sidelines any longer. Reentering the trading game does not need to be an overwhelming process since with a few simple steps you can reclaim the passion and excitement you first had when you dreamt of trading success. That success is still there for the taking if you are simply willing to get back in the game.

Jack of All Trades

With the bevy of information at a trader’s fingertips, many climb aboard the merry-go-round of learning never to depart.  They reason that improving trading results is inextricably linked to acquiring more knowledge.  If one can develop mediocre trading habits after reading one stock book, surely they’ll do better after reading five.  If one attains a modicum of success by trading a simple long stock strategy, surely they’ll see improvement if they also learn the nuances of shorting, options, spreads, and futures.  As they energetically jump from one topic to the next, one strategy to another, I wonder if some traders are passing up a more rewarding path.  I wonder if by putting a premium on the breadth of their knowledge, they’re losing sight of the depth.

Is it better to know a little about a lot, or a lot about a little?

I’d argue the latter, particularly with trading.  Better to be great at a few strategies than mediocre at numerous ones.  I suppose in the long run the ideal outcome is to know a lot about a lot, but such an endeavor takes time and is achieved piecemeal.

Twitter plays an interesting part in this process.  It reveals one’s discipline or lack thereof.  Trade ideas are a dime a dozen and it can be seriously tempting to simply follow trades at random.   If one isn’t a careful curator or disciplined observer their portfolio can become a hodgepodge of day, swing, and position trades with stock and option positions galore.

If you’re planning on attending multiple Rich Dad Education Elite trainings be sure to take adequate time between each one to practice the techniques and strategies learned in the previous class.  That way you’re taking full advantage of your education and having proper preparation for your next step in the learning continuum.

In your knowledge acquisition quest, don’t sacrifice specialization. Don’t become a jack of all trades and master of none.

Tyler Craig, CMT
Rich Dad Education Elite Training Instructor

Learn more about our Elite Stock Courses here.

Introduction to Options Trading

Why should you be interested in options?

For many traders, trading is only conceptualized in terms of options trading. This reflects the growing trend in options popularity. Since the Chicago Board of Trade (CBOT) opened the Chicago Board Options Exchange (CBOE), options that were once seen as a novelty now have billions of contracts trading annually. As more and more traders seek to control their own financial future, options become one of the first investment vehicles that new traders investigate.

Rich Dad Education has longed recognized the value that options brings to its students. Rich Dad Education elite trainings focus on teaching students the multiple ways that options can be used by traders to make steady profits. With numerous option strategies available, these Rich Dad Education financial instruments trainings prepare students to enter the market by teaching option strategies that can be used in any market condition. If the market is up, down, or trading sideways, options can be used to make profits for those who have the knowledge on how to use them correctly. In addition to providing flexibility to adjust to market conditions, options have several other advantages. Among these are:

• Increasing the rate of return on their portfolio
• Minimizing capital at risk
• Creating income on stocks that are owned
• Hedging against losses

For these and many other reasons options have, and will remain, a central focus of the Rich Dad Education curriculum. As with many aspects of learning to trade, there are numerous terms and concepts that must be learned in order to trade options effectively. It is essential that you understand the elements that comprise an options contract, the effects of time on options, choosing proper strike prices, and what strategies should be used in different scenarios. While you may be a little overwhelmed at first, rest assured that with just a little study time spent on your part, the way the options world works will become second nature to you.

Before you dive into the sea of options trading, you should take a little time to understand the concept of leverage and the benefits it provides to your options trading.

Leverage

Buying stocks can be an expensive proposition. Buying a mere 100 shares of a stock that is trading at $100 quickly ties up $10,000 of your portfolio. Options leverage allows you to control the same amount of shares for just a fraction of the cost. Options leverage also allows the investors who might have a smaller amount of initial capital to participate in the markets.

For an example of leverage, let’s assume that you have $2,000 to invest. You are interested in purchasing shares in company XYZ that is currently trading at $50. If you were to simply buy shares of stock, then you would only be able to purchase 40 shares. However, let’s assume that the $50 strike price call options are going for $2. With options leverage you could buy 10 contracts (each contract equals 100 shares) at $2 per share and control 1,000 shares. The power of leverage and options in this scenario would allow you to control 25 times more stock for the same investment.

Controlling 25 times more stock for the same investment offers much higher returns on investment than simply purchasing the stock, which is naturally the appeal of options. However, one must always remember that leverage cuts both ways. While there is higher profit potential, there is also a much higher loss potential with options investing. For this reason it is strongly advised that you gain experience through virtual trading and develop a trading plan before you make any live trades involving options.

Options Risk

As mentioned with leverage, there is a risk that you lose your trading capital through options trading. In the example above, with $2,000 dollars you can control 25 times more stock than simply purchasing the stock. However, there is a risk that if the trade goes poorly, you might lose the entire amount.  Options are a powerful tool in the right hands, but if you cannot afford to lose your trading capital then you probably should not be trading options. Too often new traders do not have the training or discipline to become successful option traders.

Part of the discipline that you will need is to adhere to your personal trading rules regarding:

• Position size
• Managing trades

Options are complex instruments with multiple choices that have to be made. For the knowledgeable trader, these extra choices are viewed as advantages and wonderful benefits to trading options. For beginners, your training should help mitigate the simple mistakes that are often made. Whatever option strategy you are using should be first paper traded until you are extremely comfortable with the reasoning, process, and results that accompany the option strategy you choose to utilize.

If you are interested in learning about trading, then it will not be long before you are drawn to the world of options.  With the proper education and training, options can be powerful instruments that can make you a highly effective trader. Rich Dad Education prides itself on creating such traders.

 

The Four Horsemen

The financial market is a playground allowing participants to express themselves in virtually unlimited ways.  As traders we can buy any stock at any time.  Such freedom, however, must be treated with caution.  One must avoid the temptation to embark on a trading binge and snatch up stocks willy-nilly. The idea is to identify low risk high reward opportunities where the odds favor a move in one direction over another.  Before one can curry favor with the odds, they must first acquire an elementary understanding of market structure.  Allow me to introduce the varying groups of market participants which could be called “the four horsemen.”

Let us begin with the two groups of buyers.

1.  Traders who are buying to go long in anticipation of higher prices.
2.  Traders who are buying to close existing short positions.

And now, the two groups of sellers.

1.  Traders who are selling short in anticipation of lower prices.
2.  Traders who are selling to close existing long positions.

Those seeking to put the odds in their favor for bullish trades are continually on the lookout for situations where both groups of buyers are present in force and both groups of sellers are absent.  Conversely, those seeking high odds setups for bearish trades are on the lookout for situations where both groups of sellers are present in force and both groups of buyers are absent.  Understanding the interplay between these four horsemen helps explain a stock’s behavior in response to certain chart patterns.

Consider a breakout for example.  When a stock is breaching a key resistance level, fresh money is attracted from the sidelines as emboldened bulls buy up shares in anticipation of higher prices.  Disappointed bears will likely exit en masse by buying to cover their positions in an effort to stem their losses or avoid giving back gains.  And what of the two groups of sellers?  Most likely they are M.I.A.  Most bears aren’t in the habit of immediately shorting stocks with the strength to break major resistance.  And most bulls avoid unloading their shares on stocks exhibiting strength.  Shown in this light, the success that many have with trading breakouts is certainly less mysterious.

We’ll take a look at a few such breakouts in our next post.

Tyler Craig, CMT
Rich Dad Education Elite Training Instructor

Dow/Gold Ratio Rockets above Decade-Long Trend Line

While I attempt to vary topics from week to week with these blog posts, I occasionally get fixated on one market or asset class that merits a double dose of commentary.  So I’m going to follow-up my last post on gold with yet more insight on the behavior of the struggling yellow metal.

Despite popping 2.72% today on the heels of a weak U.S. dollar and comments from Ben Bernanke that were supportive of additional quantitative easing, gold remains firmly entrenched in a downtrend.  It’s most recent breakdown took the beleaguered commodity to new 3-year lows at $1180.

Source:  MachTrader

One of my favorite ways to compare the performance of stocks versus gold is using the Dow/Gold ratio (previously discussed here and here).  As a refresher the ratio rises when stocks are outperforming gold and falls when stocks are underperforming gold.

As early as February this year we highlighted the potential for a trend reversal in the ratio.  The breakout above the blue horizontal line at 8 (denoted by the black up arrow) was one of the first signs that gold was losing its relative strength status.  The continued demise of gold prices coupled with a stock market that kept making new highs has finally driven the Dow/Gold ratio above the descending trend line that’s been in place since 2001.

Remember, the longer a trend line has been in place the more significant it becomes.  The fact that the ratio has risen sufficiently to breach a trend line 12 years in the making speaks volumes about the turnabout in stocks versus gold.  Consider this yet one more nail in the coffin for gold bugs.

If you liked today’s commentary come join me in one of Rich Dad Education’s weekly Trading Labs where we discuss how to trade gold, silver, and other commodities.

Tyler Craig, CMT
Rich Dad Education Elite Training Instructor