It's the small wins that hurt

This is what holds many traders back.

The small wins.

Yet we love to take those small wins, and avoid small meaningless losses like the plague.

We are afraid of losses. It doesn't matter it it is big or small, that L is scary.

It's all about the fear of the loss.

Here is the rub: the fear of the loss is always worse than the loss itself.

Losses don't hurt as bad as you think.

Remember what it was like getting a shot when you were 10 years old? That drive to the doctor was terrifying. But then you turn your head, feel that little jab, and it's over and you wonder what you were so scared about.

Trading losses are the same.

Not only are losses not so bad, but often it means you are trading correctly.

I embrace small losses.

The reason is small losses combined with big wins means you are doing something right. On the other hand, small wins mean you are doing something wrong.

It's the small wins that hurt.

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Prepare for the worst and the worst Martin Shkeli joke you ever heard

Martin: I have a horrible migraine. Prison guard: A bottle of Advil is $750,000

It's easy to lose sight of the dangers of trading when things are going well. A few good trades and you are invincible.

But it only takes one bad trade to wipe all the profit away.

Anybody remember KBIO?

A novice trader shorted the $2 stock. The next day it gapped up eight hundred percent. His account went from plus $36,000 to -$107,000 in one night. 

In twenty-four hours his life changed to the point of cowardly begging for money on social media.

He should have planned like a stoic and practiced premeditatio malorum, translated as a premeditation of evils.

In other words, prepare for the worst.

If the above mentioned KBIO trader had planned like a stoic, he probably would not have taken that trade or he'd have at least position sized in a way that protected his account. 

I know what you are thinking: that's quite the negative attitude. 

Living as a stoic does not mean you are a negative person.

Think positively but prepare for the worst while planning for success.

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Trading secret for those unwilling to understand that they can not predict the future

Traders know less about the future than they think they do. And if the trader knows she does not know, she thinks someone else does.

It's why you hang onto every word of woefully inaccurate CNBC pundits. It's why you love and hate Cramer. It's why you follow 3654 members of the Twitterati.

Sadly, it's why you risk too much. It's why you put all of our eggs in one basket. It's why you won't get rid of that losing position. It's why you do not cut your losses. You don't like the idea that you do not know what will happen. 

The one percenter understands. She knows that she does not know. Rather than trying to predict, she reacts. She understand probability. She understands risk.

I am the exception. That is why I have a trading service on Bullsonwallstreet.com. I have a crystal ball.

Okay, so I can not predict the future. However I still make money trading stocks because I know that I do not know.

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Chart of the Day: How to Trade VIX

At the first sign of a market sell off or correction, my eyes leave my well developed focus list and turn to the CBOE Volatility Index, otherwise known as VIX. During market selloffs, it is crucial that you learn how to trade VIX.

Why do I love trading the VIX during sharp selloffs and corrections?
 
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It's because the VIX smells fear and acts accordingly with wild spikes. Okay, so in truth an insane calculation that some Ph.D wrote is used, but I like to think of the VIX like a shark smelling it's prey, attacking with a mad rush, enjoying the spoils of it's victory, then settling down.

In other words, the VIX will spike up when the market sells off, hang out at the high for a short period, then ramp back down as the market settles down.

Study this chart of VXX (VIX ETF) to understand the last few times VIX has made huge moves. We are talking 30-100 percent moves in 1-2 weeks. Notice that they always correspond to SPY selloffs.

Here you can see that when volume spikes, so does VIX. We are currently in the midst of a big volume spike and VXX has ramped up from a low of $17 to $21.35. Studying recent volume spikes, it looks like we still have some room to run.

In the Trade Report, we are currently up 10 percent, as we entered VXX at $19.30 and are still holding. Once the spike is over, we will reverse and "short" VIX using invese ETF XIV.

Watch this short video on trading VIX during volatile markets and using pair trading with VIX as a strategy to profit without knowing which direction the market will move. If you like the video, please hit like on the youtube clip!

https://youtu.be/avpW0l1NhMU

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If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.

Example of a Winning Trade and Smart Risk Management: SHAK

We have been talking a lot about risk management and how it relates to being a successful trader.  In fact, three of the first five trading quotes in the 100 trading quotes series related to risk management. This should clue you in on how important I believe risk management is to winning as a trader.

My latest BOW winning trade, SHAK, is a great example of applying risk management. A range had developed in the stock's setup that allowed me to enter at $45.92 with a stop under the $45 level.  I was risking $1.

My target was $50.50, which means I was risking $1 in order to make $4.58.  That gave me a fantastic 4.5:1 reward to risk ratio.

How does this impact my trading over the long term? If I were to have an average 50% win rate with this setup over 100 trades with a 500 share position size, I would make $89,500 over the course of those 100 trades.

Do you see the power of risk management?

This exercise shows that you can become a superstar trader even if  your stock picking ability is basically as random as flipping a coin.

The takeaway from this example and exercise is that you should spend as much time studying the risk management aspects of the setup as the pattern of the setup itself.

Took profits in $SHAK today. pic.twitter.com/nD5XQtlCnh
— Paul J. Singh (@PaulJSingh) March 24, 2015

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100 Trading Quotes To Put Into Action And Change Your Life: Caution Is A Risk

The first quote in the "100 trading quotes to put into action and change your life series" speaks to a specific trader type.  When thinking about risk, we often think of the trader who is impulsive, trigger happy and position sizes much too aggressively.  However, there is another type of risk of which former Indian Prime Minister Jawaharlal Nehru spoke:

The policy of being too cautious is the greatest risk of all.

Let that sink in for a moment.

We generally become conservative to combat risk.  As traders we become overly cautious, decreasing position size, holding out for better trades, sometimes passing on a trade because it is not the perfect setup.  We may use analysis by paralysis taking into account factors that end up having little to do with the setup to justify not taking a trade.

Many traders are proud of themselves when they trade like this. They feel like they've accomplished something by not losing any money.  Well I've got news for these guys.  They will never become anything more than an average "keep up with the market" trader.

Is that why you trade, to keep up with or slightly beat the market?  If so, stop analyzing the markets and just park your money in an ETF.  If you are reading my work, I expect you to kill the market.  You had better expect to make 20-100 percent gains even in down markets.

Now am I saying to throw caution to the wind and trade like a maniac in order to capture big gains?  I think you know my answer.  No, I am not saying that.

Instead, you must trade intelligently aggressive.  When an opportunity arises, you take your shot and make it count. You strike right away and get bigger with your position sizing.  Knowing when to do this comes from careful analysis and stalking of the right opportunities, when "preparation meets opportunity" (this Seneca quote will be one of the "100 quotes later on in the series).

If you are not prepared, you will freeze up.  You will become conservative, cautious and pat yourself on the back for not taking the risk.  Don't be that guy (or gal).

We are winning traders that gameplan, stalk opportunities and strike when the time is right.  We go big, but do so intelligently, still managing risk and strategically managing the trade so it does not hurt too much if wrong.  That's how every successful trader trades.

If you want to be successful, remember that being overly cautious is an "opportunity lost" risk that will keep you from your trading dreams.

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APOL Offers a Low Risk Setup

APOL has a weird, volatile pattern, but still offers a low risk setup off a breakout-pullback.

An entry here at $71, with a stop under the moving average at $69.60 and a target at $74, offers a 2:1 reward to risk ratio.

CPLA, another education stock, has a similar setup.

Is DE (John Deere) a Short Setup?

A Trade Report member sent me an email about DE. Here is the e-mail and my response

I think it is great time to short "DE"? RSI, OBV and MACD are all bearish...plus, the Durable good is bad..

While the price pattern is not bearish, I agree in that RSI is showing a slight negative divergence and the stock is overbought. Resistance at $47-48 gives us an easy to manage trade, with a stop just obove that level. Teh $42.50 pivot area gives us an easy targt. Nice reward to risk.

However, keep in mind there is also a loose cup and handle formation and we could see a breakout at resistance. As long as you manage the trade properly and are willing to take a small loss, the trade is acceptable even with that concern.

Is This Breakout Sustainable?

The market and leading stocks are breaking out after a short consolidation period and overbought readings that are still extreme. Due to the extreme overbought readings, I'm taking a few "speculative" shorts. However, they are done with caution and small positions size.

The idea behind these trades is to expect a small loss. If the trade works, it will be a multiple R gain. It goes to my trading philosophy of small losses and multiple R gains.

Too Extended to Enter Longs

While them market is too extended for my to add to my long positions (report members know that I was long before the move using the oversold bounce strategy), there are some low risk short setups among inverse ETFs.

Today's Trades: FCX and MON

I made two speculative trades today, short FCX and long MON.

MON is oversold, but still a few points from support. The higher probability setup is to enter long at $70, which I will do if I get stopped out of this trade.

FCX shows a bearish pattern, but has bounced over the 50 day moving average.

Both trades are low risk, but average probability. Obviously I am using tight stops for these trades.

The "Experts" Get it Wrong - Example 1

Complex systems are rarely predictable. For this reason, I focus as much on risk in my trading systems as I do stock picking and setups.

In most disciplines that try to predict the future, the so-called experts aren't much better than a novice. This series highlights this point.

Example 1:

In the 1979 NBA draft, Larry Bird was drafted 6th overall. Considered of the the greatest players in NBA history, he lead the Boston Celtics multiple championships, was a 12 time All Star and helped revitalize the NBA with his rivlary with Magic Johnson.

Many of the experts said he was too slow, could not jump, and his college game would not transfer to the NBA. Only one of the five players selected ahead of him made an all-star team, and none are in the Hall of Fame. Obviously, the experts go this one wrong.

Short Setup: AMZN

AMZN has broke down below the 50 day moving average and shows a negative volume pattern. RSI has also broke down. Looking for entry on bounce, which would provide a low risk setup.

Against the Apple Trend

AAPL is on my bullish watchlish. Why wouldn't it be? It has a great price and volume pattern, and has shows relative strength versus the S&P 500.

However, the stock is very overbought. Every one of the measures I use to find "rubber band" setups is off the charts. I will likely short the next move higher.

This is a countertrend trade that is very short term and managed with a tight stop. Remember, I am long on this stock. The short "rubber band" trade is short term and against the trend.

One That Got Away: IBN

A useful tool for improving trading is to analyze trades that you did not take. IBN has been on my radar for since the April breakout. I did not trade it because the volume pattern was not to my liking.

However, the risk ratios have been good through out that time period. Price has been near support and provided classic entries, the latest being the recent consolidation pre-breakout. Lately I've been lossening my volume requirements when I get favorable risk ratios (usually above 3:1). Obviously IBN would have been an ideal candidate for my new stategy.

Low Risk, Average Probability Setup

Today's Trades: CBI and PNRA

CBI: 200 shares at $11.00

This stock, as with most of my trades, was mentioned in the Trade Report last night. It's holding above both the well formed trading range and the 50 day moving average, providing a low risk, easily managed traded. Stochastics are oversold and turning up.

Risk: My stop is under the 50 day moving average (10.50) and my intitial target is near the recent high in the 13-14 range. This gives me a 5:1 reward to risk ratio.



I also went short 200 shares of PNRA at $47.83. I will post a chart later today.

Friday Game Plan

I'd like to pick up a few long positions in anticipation of an inauguration rally. The fact that we are very oversold increases the chances of a rally. I will still use tight stops with the strategy of taking a small loss with the possibility of a big gain.

Trade: FAS

I went long 200 shares of FAS at $17.63. This is an "oversold bounce setup. This is a low risk trade with a stop just under the support line on the chart. My target is in the $23-25 range. This provides a 3:1 reward to risk ratio.

Breakout-Pullback Setup: HPQ

The market is still overbought, so I am not looking to enter any long positions just yet. However, HPQ has formed a nice pattern and is nearing an ideal entry.

Setup: Breakout pullback. Yesterday the stock broke out over price resistance on strong volume. Today's pullback was on lower volume and help up quite well considering the overall market. A few more days of low volume pullback to the bottom of the breakout bar would provide a low risk entry.

Risk: Entry at $37.15, with a stop at $36.50 and target at $39 provides a 2.8 to 1 reward to risk.

Note: Pullback *must* be orderly and on low volume. Strong gaps down or big price bars negate setup.