The First Cardinal Mistake:
LACK OF A GAME PLANI have published several advisory services over the past 8 years (1981). I have had thousands of contacts with the trading public. I never fail to be amazed that year after year, trade after trade, that their approach is the same. A trader who thinks a market is about to start up will usually say something like -"I think Gold is going up to $600. Where do you think I should buy it?" My response is usually something like, "Well, where are you going to get out if you are wrong?" Often there is silence, or perhaps a puzzled "Huh?" They never thought about being wrong, they never thought about where to put their stop. My next question -- "Well, if it does go up, how and where are you going to get out?" -- often receives the same response.
Better than 90% of the commodities traders that I have come in contact with have no game plan. That means they do not know what to do if they are wrong and they do not know what to do if they are right. The large paper profit they made often turns into a large loss because they did not know where to get out.
One of the most important moves a futures trader can make is to develop a game plan consisting of these basic guidelines.
- Know how and where you are going to enter a market.
- Know how much money you are going to risk on each and every trade.
- Know how and where you are going to get out if you are wrong.
- Know how and where you are going to take profits if you are right.
- Know how much money you are going to make if you are right.
- Have a Safety Stop in case the market does the unexpected.
- Have an approximate idea of when a market should meet your objectives; when it should begin to make a move, and if it has not done so, get out!
Next: The Second Cardinal Mistake: Lack of Money Management