Welcome ladies and gentlemen to The Stock Market Millionaire. This is episode number six. My name is Robert Roy and today I want to talk about trade management. You’ve got to understand a couple of things about managing your positions, because if you are not careful, you will end up in stock market jail. Now I understand that really isn’t a prison per se, to put you in. But stock market jail, is you buy an equity, a stock, an option, whatever it is, a futures of forex, but you buy that position at $28 a share. Let’s say we’ll just talk stock. And all of a sudden you find that same position is now trading at 22, right? That’s stock market jail, because most people are stuck and can’t afford to sell it, even though it’s probably the best thing to do. Support’s been violated, This thing is all over the place, it’s screaming “get out!” and you’re just ignoring everything it says. Everything that it’s talking about, the stock is talking about to you, you’re avoiding.
This is not how to make money off of stocks. Not that way. The “how” to make money off stocks is to understand how to manage your position. So let’s talk about exactly what trade management is.
You see trade management, proper trade management, is going to be based on the type of trade that you do. Well, what does that mean? Well, if you buy a stock or you buy an option, you may have a little bit longer time on the stock to make a decision, reason being an option expires where a stock doesn’t. You have a little bit more time for that, but take it even a step further. Let’s say on the stock, you’re trading an option; the option expires, but that doesn’t mean that there’s only one way to manage your trade. And what I mean by that is it really comes down to the strategy that you’re using.
I mean, what strategy are you focused on? Think about again, I mentioned buying a stock versus buying an option, but what about just a directional trade? ex. If we buy a call versus buy a put. Same risk profile in those trades, right? It’s directional, it has to go my way.
Then there’s a credit spread. A credit spread, it has to go either A) in my direction, B) sideways, meaning right about where it is, or C) against me a little bit. In that scenario, I am right as long as it doesn’t go against me a lot. I’m right. As long as it doesn’t go against me a lot. So you don’t get hung up, don’t get pigeonholed into a “one rule for everything” because you will not find it.
You can make a living trading stocks, you can make a living trading the market, but not if you are narrow minded and only focus on giving me one, only one way to do this. You know, everybody needs a little bit of variety. If I had to pick a food that I would eat, the rest of my life, pizza would probably be it. And of course, it’s all the stuff I shouldn’t be eating right on that. The bread, the cheese sauce is good. Oh, wait, it’s got the oil in it right now. Oil is good. Okay. We can argue that point on a different podcast, buteventually, I would probably want something else on the pizza than just cheese. Give me some vegetables. Give me some chicken. Give me a salad. Pizza or pasta. Yes. I do love pasta on pizza. Okay. Especially if it’s vodka sauce. Anyway, anyway, anyway, enough about the vodka.
So you really need to make sure when it comes down to your trade, the trade that you’re looking at, the type of trade is how you’re going to focus on managing the position. So, proper trade management is based on the strategy. I can take a different risk with a trade that has multiple potential of being right versus a directional trade where it has to go my way.
“But Rob, if I buy a stock at $30 and it’s at $30 a year later, it didn’t cost me anything. I’m okay. So sideways, I still don’t lose any money.”
No, no, no. You did. You lost what’s called opportunity cost. What was the opportunity that you missed out on because you did not have that cash available to invest elsewhere? Be very cautious on getting hung up by that. I know there are some people out there preaching that “we never lose on our trades!” Yeah, you never close it; You got the same stock for the last 18 years. And it started out at 42 bucks and now it’s at 42 cents. “Oh, we didn’t lose any money yet.” We didn’t close it. It may come back. Yeah, in whose lifetime? Very cautious there.
I want you to start focusing on a risk reward ratio. And that is a very common phrase – a risk reward ratio – but there is a problem with the wording in and of itself. From a psychological standpoint, you focus on, you grow, you learn, you earn from the things that you are focused on. And, when you are focused on risk:reward, the first thing your brain heard was risk.
*ALERT SOUND* Defense mode right away! No, no, no. Get away. No, stay back. Right? Risk. No, I don’t want risk. You risk your life everyday crossing the street, right? Especially here in New York, I’ll tell you what…
Risk is not a bad thing, but I want you to get away from the words, risk:reward and flip it around to reward:risk ratio. Make the very first thing that you hear mentally be the positive. My reward, “Oh, I get something for this. I will be rewarded.” But, what is the reward risk ratio that you’re looking at?
I have many traders that tell me that they’re willing to risk a dollar to make a dollar. And I am not saying that their strategies don’t work, but I am saying this: You’d better be damn good if you were trying to do a one-to-one reward risk ratio. That means you have to win six out of 10 times just to barely make anything.
For my strategy, I am looking to have a $2 reward for every $1 I am willing to risk. Now think about that. That means, let’s say that I have six trades go against me. If I’m willing to risk $1 in each of those trades, excuse me, $1 on each of those trades. I mean some underwater $6, the four trades that I am looking to gain $2 on. Well, if I had four trades times $2, I would have $8 of profit. Wait, wait, wait, wait, wait, Rob. So you’re telling me if I have six trades go against me. I lose on 60% of my trades. No, it was a cost of doing business; you didn’t lose. Stop with that word too. It’s not a loss; It’s a cost of doing business. ” Okay. Okay. Okay. Fine. A cost of doing business of six trades that went in a different direction that I thought, how about that? Is that okay?” Good. When a different way than I thought. So now I’m underwater $6. What if I went on four trades and I had a $2 reward on each of those, I’d make 8? You’re telling me what, just four out of 10 trades. I could be a successful trader. Yes.
Now, Rob, that I was told, I need to have 70% of my trades as winners. Well then the strategy is not very good and your risk is probably much higher than it really should be inside of that trade. Listen, how many baseball players back 70%? Or 700? Get, you know, get on base seven out of 10 times. They don’t. If you’re a baseball player and you’re batting 320 and you take another baseball player, who’s batting 400. What’s the difference between the two ballplayers? Well, I can tell you why it’s the difference of another zero in your paycheck and the hall of fame period, period. Wait, what? For that small of a difference? Yes. It doesn’t take a lot, but you definitely need to focus on the reward to risk ratio.
So the way that I look at the trade management, that’s a lot more than just your exit, right? You really want to be not concerned but focused, hyper-focused – I love that word, hyper-focused – you want to be hyper-focused on four different components, right? And that is what I call my Strategy Creation System. Now I’ll give you an overview of it here. We’re going to do this in another podcast, but Strategy Creation System, S.C.S. Strategy creation system. It is mine. It is created by myself. It it’s something I’ve used for two decades now, right? It is a complete or total trading system. Now the four components in there are identify, enter, manage, and exit.
Oh, Rob come on. So, yes, I’ve heard this before, Rob, you’ve got to enter a trade for you to be in a trade. You got to enter one. Okay. You’re right. You got to enter it. And then of course, well actually back up before you enter it, you have to identify it. Once you’ve identified it, then you can enter the trade. Once you’ve entered the trade, you need to manage the position, and after you manage it, you need to exit it.
And some of you are sitting there right now going, DUH. Duh, of course you have to do that! Let me ask you a question. Sounds simple, doesn’t it?
If it’s so simple, why aren’t you doing it? Why? “Uhhh…” There you go. If it was that simple, everybody would have a profitable trading system. It doesn’t work that way. Trading can be very complex, but if you will break it down into small bite sized chunks, how do we identify the candidate? How do we enter the candidate? How do we manage the position? How do we exit the position? If you could break it down into those chunks and develop components of the system around it, that is how you generate a very successful trading system. The potential there is vast. Is great. Okay.
But keep something in mind when it comes to managing the trade, the trade management is a lot more than just the exit of the position. It is, how do I do everything that I do inside of that trade from start to finish, soup to nuts, in order to turn it into the best results I could see. That is what we’re looking for.
You want to know how to make money off of stocks? Develop a winning trading system. You want to, how to make a living in the market – because you can make a living trading stocks. You can make a living trading options – You want to knowhow to do it? Develop a system that works. But the key, the key to it is all going to be trade management. Trade management is everything I mentioned. Identify, enter, manage, exit.
Alright, ladies and gentlemen, there, you have it. You have a wonderful rest of your day. Stay focused on the quest to becoming a great trader. Keep crushing it. And remember ladies and gentlemen, you’re just one trade away. I will see all of you at our next episode. Take care. See you then. Bye.