I recently received a call from a very prominent Wall Street "guru" who wanted to know why I was so intent on revealing my secrets of success in the stock market. He was of the opinion that not only were my efforts a waste of my valuable time, but that if I truly succeeded in teaching these inner workings, it would result in many of my techniques becoming obsolete due to their overuse.
While I simply don't have the space to fully address this gentleman's question, I would like to establish one thing before we go any further. These methods and techniques are not my secrets or anyone else's for that matter. And whenever you even hear the words, "I am going to reveal my secrets on how . . . .," you should make a 180 degree turn and run as fast, and as far away, as you possibly can. Why? Because that is an old sales pitch which has been used by every bullshit artist since the beginning of time. And if you stay around long enough you'll end up losing your shirt.
The fact is, the public's belief that "secrets" exist helps to support a multi-billion dollar book industry, as there are no less than 3 financial books published every single week (all of which contain the "ultimate" secret to riches, of course). And this is not to mention the multi-millions of dollars spent on the latest computer software programs which will triple your money every 3 months, "guaranteed".
No, my friends! As disappointing as this may be, there are no secrets. . . . . . .just plain, old-fashioned common sense. And I am about to go over a few common sense sell guidelines which should help you to better ascertain when to exit your trades. In addition to individual sell pointers, I will reveal to you what I like to refer to as the Pristine Profit Plan (PPP). I strongly encourage that you make every effort to understand it, as it is a simple (common sense) approach which makes it IMPOSSIBLE to lose money in the stock market over time.
Now I know that sounds like a sales pitch, but I'm not selling anything remember. You are already subscribers.
Once again, I am presenting something which I feel is worth several times the annual subscription rate to The Pristine Day Trader. Read it, study it, keep it, and above all employ it. There is no doubt that knowing how to sell and when to sell will help you obtain more consistent profitability in your everyday trading. So, let's get right to it.
THE PRISTINE PROFIT PLAN (PPP) (A simple approach which will render it mathematically impossible to lose money)
RULE NUMBER 1:
NEVER LOSE MORE THAN 8% ON ANY STOCK What is the trader/investor's most valuable commodity? His/her initial capital, of course. What should be of paramount importance is the preservation of your starting capital. This is your life. This is what will keep you in the game, and it is foolish to do anything that will jeopardize it. That is why you should never be willing to let a position go against you by more than 8%. If you have entered the trade properly, and your timing was precise (our suggested entry points take care of this concern), the issue SHOULD NOT decline by more than 8%. Otherwise, something has gone amiss and the trade should be eliminated with no questions asked. But what if it's a blue chip company? What if the earnings are still positive? Frankly, these are the rationalizations of an amateur. The earnings of a company don't put money in your pocket. Neither does the color of the company's chip. There is only one thing that can put money in the bank and that's a RISING STOCK, not a declining one. Remember, all stock are bad, unless they go up. Cut your losses at 8% and move on.
RULE NUMBER 2:
ALWAYS TAKE PROFITS (AT LEAST SOME) AT 20% - 25% Once a stock you own rises by 20% or more, it is foolish not to pull at least some off the table. This really boils down to common sense. Stocks have a tendency to advance 20% to 25%, then decline before they take off again (if they are going to take off again at all). I am in the habit of comparing my daily and weekly profits to the CD purchaser. I constantly ask myself, "How long will it take for the average 1 year CD to produce the gains that I have in this stock right now?" This question is an excellent way to keep your feet firmly fixed on the ground of financial reality. It also does a good job of tempering greed, one of the biggest enemies of every trader. It would take the purchaser of a 1 year CD paying 6% more than 8 years to match a 20% stock gain. Nearly all of you have witnessed many of our stock selections rise 20% or more over several days. But more important than all of this is the mathematical magic that the combination of Rule 1 and Rule 2 brings into being. If your are disciplined enough to cut losses at 8% while taking profits at 20% - 25%, you can't possibly lose money over time as this law of mathematics cannot be broken. with these two simple rules, you can lose three times and win only once and still not get into financial trouble. Now, if you can't produce 1 winning trade out of every 3, you don't belong in the market. Of course as subscribers this shouldn't be your problem. I know two traders who sell only on the basis of Rule 1 and 2. The stocks that they buy will either be sold at an 8% loss, or they will be sold at 20% or above. That's it. That's their only sell rules, and they are both rich, I might add. But I will show you how to do even better.
RULE NUMBER 3:
ONCE A STOCK RISES BY 6% TO 8%, MOVE YOUR SELL POINT TO BREAK EVEN This additional sell rule is not employed by my friends mentioned above, as they operate on a do or die approach. Either their stock produces a 20% gain, or it produces an 8% loss. I don't believe you should be so fatalistic. Allowing a winner to fall back into losing territory is just not smart, no matter what the reason. It is hard enough being right in the stock market without allowing the winner to turn into losers. So after a stock has demonstrated it's ability to move in the desired direction, you should take further action by raising your sell point to break even. This will have the effect of taking ALL of the risk out of the trade. At that point you can literally put your feet up on the coffee table, lean back and watch, as there is no initial capital at risk. I can not begin to tell you how psychologically important this rule is. Once a trader realizes that money can no longer be lost, a tremendous calm and clarity begins to pervade his mind. A sense of power and control evolves as he adopts the frame of mind of an employer who has now hired an employee (the stock) to do all the work. Once you're up 6% or more, decide never to be down in that position again.
RULE NUMBER 4:
ONCE A STOCK RISES BY 10%, PROTECT 3% OF YOUR PROFITS This rule should be self explanatory after Rule 3. There are some who might ask, "Why just 3%?" And it's a good question. So let me explain. At Pristine, we have one very simple goal for our personal and managed accounts. We strive to produce a 3% gain every month. Now it should be obvious to you that we supersede this goal by leaps and bounds as we are already up over 100% year to date. So why so small a goal? Well, in reality this goal is not as small as one might think, despite the ease with which we appear to top it. If you can produce a monthly gain of 3%, your annual return will be in excess of 45%. Now, if you can produce gains in excess of 45% annually on a consistent basis, Wall Street would be sleeping outside your door (we step over them every day, smile). Let's take the scenario a bit further by asking, "What if you produced an average 3% gain on all of your stock trades?" We certainly wouldn't have to worry about your financial condition. That's for sure. So are you starting to understand why we will not let that 3% get away from us when we have at least a 10% gain? Go do likewise my friends. I promise you won't be sorry. Nickels and dimes do add up.
RULE NUMBER 5:
ONCE A STOCK RISES 15%, PROTECT 10% AND TARGET YOUR 20% PROFIT POINT You now know the rationale. The higher a stock continues to rise, the greater the probability of a decline. So with this in mind, we tighten our stops and only give the stock a 5% margin of movement. It is at this point that we experience a lot of sells as many of the stock selections fall back a bit. But in most cases, the 10% gain is produced over several days. The average mutual fund produces gains in the area of 7% yearly. So why should we be disappointed? Besides, there is no rule that says we can't repurchase a stock after selling it. We do this all the time. Now a good portion of your selections will not stop you out at 10%. These are the stocks which tend to be the future leaders in the market. Once you have a 15% gain and you have moved your stop to protect 10% of your profits, determine the exact price at which you will sell at least 1/2 of your position. This step that I am mentioning now is one of the hallmarks of a professional. At this point he comes to the market every day knowing precisely where he will exit. When the price reaches his sell spot, he leaps into action unfettered by indecision and confusion. There are no rationalizations, no waiting for another 1/4 point, no delaying, just action. We favor the approach of selling only half of your position, especially with those stocks which have run to this level in less than 2 weeks. Rapid movement of this nature indicates very strong demand and the likelihood that it will carry is very great. The remaining half can stay in as long as the stock stays above it's 50 period simple moving average (sum of last 50 closing prices divided by 50).
COMMENTS That's all there is to our Pristine Profit Plan, just 5 relatively simple rules. However, let me be very real for a moment. There is no question, that if you are disciplined enough to follow a plan such as the one just outlined, it will dramatically improve your results many times over. But the fact is that most individuals will not comply. Why? Where will they fail in their attempt to stick to a proven money making approach? Nearly all will fail at the very beginning, Rule Number 1. If I had to choose the biggest difference between winners and losers it would by rule number 1. Winners cut their losses short and move on to the next winning trade. Losers hold on to falling stocks 1/4 point by 1/4 point until the very ability to make a rational decision has been zapped from their bodies. This costly fault is also an ego problem as selling at a loss forces the trader to admit that he was wrong. As long as he holds on to his dud, he does not have to really admit he has made a mistake. This attitude and frame of mind is the hallmark of a loser. And finding someone who thinks like this and suffers from this paralysis can actually be a gem in and of itself. Once you have pinpointed a true loser, reverse his every decision and I guarantee that you'll make a fortune. Because when he should be selling a losing position, he'll buy more rationalizing that it's now cheaper that his original purchase. When he should by buying, it will look too high for his taste, or the spread will be too big, or the P/E will be too high. He will find any excuse not to take a winning trade. Why? Because a loser can't help it; the simple truth is winning is against his nature.
A FINAL NOTE When I first started out in this business, I lost money consistently. The day I bought a stock was the last up day that issue would see in a great while. When I sold, it was sure to be the bottom just before a major multi-month advance. I was a kid without any direction, without any experience and no one willing to help me get it. I spent many years and a lot of lost money to get to the point at which I am now. Where is that, you ask? Well, I'll answer that by telling you what I demand from the people who work for me. My traders must be able to take $50,000 and a margin account and produce $1,000 in profits a day (and I mean every single day if they like working for me. I accept no excuses.) But let me tell you this. A very talented trader would not even be impressed with that. I had the privilege of spending a period of time with an individual who effortlessly pulled $40,000 a day out of the markets. And guys, that is no typo. The time I spent with this "master" was worth more money than most people will ever see in a lifetime. If you are ever fortunate enough to find a successful market player like this, do everything in your power to procure his guidance. Pay him $100,000 for several weeks instruction if you can. Believe me, that sum will prove to be a mere pittance compared to the future rewards. The time and money saved alone will be well worth the cost.
The Pristine Day Trader was formed to partly provide this guidance which I so desperately needed in my early years. And while it can never replace the benefit of personalized instruction, I do believe it is the next best thing. Good luck my friends, and happy trading.
