I discovered Getting Things Done a few months ago and like many people have implemented a unique blend of its recommendations into my life. Although the philosophy does help you literally get things done, the most valuable benefit from using the system in my mind is stress removal. The stress that I was able to rid myself of was not “jump off a bridge” stress, but the stress of remembering what tasks I had to do – stress I didn’t even realize I had.
There are few activities that require more concentration, hard work, and discipline than that of stock trading. The market is a beast that can reward as well as crush you. Many traders quickly turn into obsessive tape watchers with real time stock quotes streaming from pre-market to market close. The stress that comes from this type of obsession can range from roller coaster emotions of normal price fluctuations all the way to psychological addiction.
It doesn’t have to be this way. I’ve developed a trading style by pulling from various sources: the Investor’s Business Daily, the GTD philosophy, and tons and tons of books on the market. Here are some guidelines that I’ve come up with to apply GTD techniques to trading the market. I’m in no way suggesting you should necessarily do the same – I’m just pointing out what has worked for me.
- Find your own trading style
- Be ready to react to anything
- Enter orders before the market opens
- Use limit orders
- Immediately enter stop loss orders after a buy executes
- As price goes up, slide the stop loss up also
- Don’t trade during earnings season
- Keep a record of all trades
- Develop a relentless search for more knowledge
- Don’t buy what you know
This is easier said than done. You need to determine what works for you. Are you a short term trader? Swing trader? Buy and Hold? Once you’ve determined what criteria you use to pick and trade stocks, you’ll never be swayed by hot tips or message board scams.
What are you going to do when the stock you purchase tanks 10% right after you buy? Do you average down? (hint: don’t ever do this!) What if it goes up 10%? Will you take a quick profit? If you plan for all these situations before you make a trade, then you will be able to unemotionally follow your plan no matter what the market does.
Once you are in the middle of the market day, emotions rule! Fear and greed will take their toll. Stress levels rise. Enter your orders before the market opens, and then just wait for the email your online broker sends you automatically when your predetermined price is reached. This amounts to zero stress!
Market orders are filled at the current market price. Limit orders only fill when a certain price is reached. This lets you guarantee the price you get (if the order executes). There is all kinds of tom foolery with market orders by the market makers.
This is the most important rule of all. Once one of your limit orders executes and you’ve taken a new position in a stock, without hesitation enter a stop loss order at your predetermined level. A stop loss is a special kind of limit order that only executes after a the stock trades below the activation price, a price that you determine when you enter the order. This allows you to automatically execute your plan without watching the market all day long.
Everyone hates being wrong. But you will be wrong quite often. Even the best traders in the world can be wrong half the time and have a stellar year. What is hard (and stressful) is admitting when you’re wrong and exiting a position at a loss. Set a hard and fast limit that you strictly adhere to. 7-8% is a reasonable limit to impose on yourself. Hopefully you can pick stocks where you can place stop losses closer to the buy price, limiting your risk further. How much more money would we all have today if we followed this rule during the dot-bomb slide?
Hopefully some of your buys will result in the price moving in the direction of your trade (whether your short or long). When this occurs, lock in the profit by tightening your sell stop by moving it closer to the current price. This allows you to automate the hardest part of stock trading: when to sell. Sure, you will never sell at the absolute peak, but no one ever does with any consistency.
During earnings season, even great news can inexplicably bring a stock price down. It is the most unpredictable time and its best to avoid trading during this period. Consider taking partial profits just before earnings season to reduce your exposure to the volatility.
It is crucial that you keep track of all trades you make along with your plan at the time. This will allow you to go back and rate yourself and measure your progress. Did you allow a loss to get away from you? Did a particular trade violate any of your basic trading rules? Charles Kirk over at the Kirk Report is very good about keeping records and honestly evaluating his progress.
There are tons of great books out there to help you find the trading style that’s right for you. Much of the philosophy I use comes from books. For starters, you should read Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets. It was published in the ’80s, but the philosophy is easily applied to today’s markets.
This sounds a little counterintuitive and it might not fit everyone’s style. Here’s the reason I follow this. If you buy stocks you are intimately familiar with, you will get emotionally involved – you will “fall in love” with the stock. When this happens, you are more likely to bend your rules to fit what the stock is doing. You need to remove emotion from the game and it helps when you (gasp!) don’t know or care what the company does. The stock is just a collection of numbers that may or may not satisfy your criteria and therefore may or may not show up on your trading radar.
Following these rules will help you trade stress-free and you’ll automatically follow a rule that will make you money: limit your losses and let your profits ride.