Asset Protection Plan
The Smart Profits Report: Issue #371
Wednesday, November 15, 2006
Asset Protection Plan: How To Avoid 3 Mistakes That Will Cripple Your Investment Account
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
It’s the single biggest reason why people blow out trading and investing accounts. And most people never see it coming until it hits them like a runaway bus. What is this killer “it” - the thing that eats accounts, hopes, dreams, and cash with indiscriminate ease?
Before I just blurt “it” out, I’d like you to think about your personal situation, and what one, single bad habit has caused you to lose big chunks of money over and over again? Because if you’re like the vast majority of traders and investors, your personal story has “it” at the core.
The “it” I’m talking about is failing to get out of a bad trade when you should, and simply letting your losses run because you don’t have a solid asset protection plan.
It’s the world’s biggest account killer. So today, let’s look at how this cripples many investors - and more importantly, ways in which you can separate yourself from the crowd, and combat this universal problem.
Are You Making These Three Account-Killing Mistakes?
As a trading coach, I’ve had the honor and pleasure to train and teach thousands of traders and investors over the years. And over that time, there is no doubt that letting losses run is the single biggest killer in the investment world.
Are you making this critical mistake? The first problem is that some people don’t realize they are letting their losses run. So here’s a partial list of how this problem might show up in your trading and investing:
- Having No Exit Plan: Too many people still enter trades or longer-term positions with little or no idea of how they’re going to get out. And if you have no plan, then any size of loss on that trade seems acceptable at the moment.
- Ignoring The Plan: Many folks start with an exit strategy (good for you!) and then as they get close to the stop-loss point, they move, cancel, or ignore the stop-loss.
- Changing The Plan - For The Wrong Reasons: I’ve heard countless stories about people who’ve entered a short-term trade and then held on much longer when things went against them. For example, there are times when a day trade moves the wrong way and the trader hangs on overnight, hoping for some help at the next day’s open. But then it gaps against them in the morning, and the day trade turns into a long-term position trade - all because the person wouldn’t honor their original stop.
Three Simple Steps To Avoid Big Losses
Here’s an easy-to-follow, three-step process that will send you on your way to eliminating those big losses in your account and helping you create your own asset protection plan.
- Develop a Trading/Investing Plan: Before you enter a trade, it’s critical to have a plan that tells you when and why to get out. The reason why is so very important, because it’s the anchor that allows you to stick to the plan when your stop loss is hit, and keeps you from moving or ignoring your stops.
- Stick To Your Plan: Once you have a “get out” point, you have to honor it. This is the step where many stumble, because the “need to be right” kicks in. They have a plan that tells them when they should get out of the trade… but they don’t. The most useful trick that I’ve found to beat this is to write all of your stop-loss points on a sheet of paper. This makes a stronger psychological commitment to yourself, and makes you much more likely to honor your stop-loss point.
- Use The Right Position Size: Even if you make a plan and stick to it, you can still suffer some really big losses if you trade in sizes that are too big for your account (too many shares or too many contracts). Make sure that your worse-case loss for each trade or position would be no bigger than 1 or 2% of your account, and you’ll be on your way to long-term trading success!
Good Trading,
D.R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- Back in September, the Amaranth hedge fund proved to every investor just how important it is to make sure you manage your risk properly and have a good exit strategy in place in case the worst happens. In just one week, the fund limped away with a $4.5 billion loss under its belt. Make sure you follow the simple tips I provided in Smart Profits #355, Risk Management and Position Sizing: Three Ways To Give Your Trades A Tune-Up… and make sure a similar fate doesn’t befall you.
- Don’t forget to check out Smart Profits #363, Trade Small… Save Big: The Single Best Piece of Trading Advice Ever in which I offer new traders a remarkably simple, yet powerful message for investing within today’s fast moving and volatile markets.
- For something completely different check out Smart Profits #352, How Derivatives Work: Use the Options Boom to Beef Up Your Leverage by Mt. Vernon Research Investment Director Karim Rahemtulla and delve into the world of derivatives; what they are, how they work and how you can use them as leverage towards massive gains within the markets.
- As always you can find other great articles within the Smart Profits Site Map.
Related Articles:
- Common Option Mistakes: Four Options Resolutions to Make Today
- Portfolio Diversification: Falling In Love With Investments Can Cost You Millions
- Stop-Loss: Three Reasons to Get Out of a Trade Before it Hits Your Trailing Stop
The Chart of the Week
Support and Resistance Study: As you can see from the chart below, Broadcom (Nasdaq: BRCM) has just broken above an intermediate resistance level. From here, we can reasonably expect that it should move toward $40 - its next key resistance point.
But if it’s a false breakout, we’d be seeking the $26.33 level. Which will it be - a real breakout or a false one? The broader semiconductor index should give us some clues: Neither $SOX or SMH have broken above their October highs yet. If they do in the next week, then BRCM is a good bet for a bullish breakout; if not, be very cautious from the long side.
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