This topic could take many turns, but the one that I want to discuss is trading stocks, options, E-Minis futures,or a currency pair. When we first start trading, the easier concept to grasp is directional trading. We begin the hunt to find a stock or an option to trade, whether the market is bullish or bearish.
We know that we want to “buy low and sell high”.
This is considered an offensive attitude, buying a product at a low price or on sale, then holding for a specified period to sell that same product at a higher price. Bingo, we have a profit. Many of us are in an offensive state of mind frequently in our lifetime.
Buy a house and sell later at a greater price, buy a collectible at a sale price, and sell it later at a higher price. At least that is the way we wish our investments will go.
What happens when a trade or a deal goes against you?
Do you freeze in your tracks and don’t know what to do? What happens when you have a small profit, but you know there is more potential. Do you want to grab your money off the table or do you want to see how far it can go? Stop and think about this. Change your attitude hat. This is where we switch uniforms from offensive to defensive. Our goal now is preservation of capital, preservation of profits vs. the pursuit of profits.
How do we preserve capital?
- Use stops to minimize possible losses.
- Use a hedging strategy to offset a potential reversal in profit.
- Get out if you become too nervous or cannot think of a good way to preserve capital.
- Scale-out of your trade and reduce risk as the trade moves in your favor.
Building wealth is not only about making money, it is equally about preserving capital.
I use three pools of money in my plan.
- Money I earn – This is the money I earn from performing a “job” or that my business brings in. This is my offensive hat.
- Money I keep -This is the money I put into savings, the excess money I do not spend on taxes due to legal entity structuring of my business, the money I save from not paying interest on any loans except those that are tax deductible, the money I save by never paying full price on anything. This is my defensive hat.
- Money I grow – This is the money I place in investments. I have smaller pools of money within this general pool of growth money. Think real estate, stock market, collectibles, insurance products. This is my offensive hat.
Here at WealthBuildersHQ, we encourage building wealth from various financial markets. Rob Roy, founder of WealthBuildersHQ, teaches trading in the Equities, Options, Futures, and Forex markets plus some about Gold and Silver as a hedge. We would love to have you join our trading team.