It��s often said that baseball is a game of inches. For example, if that fly ball would have been just a few inches higher, it would have been a game-winning home run instead of an inning-ending out. Or if that grounder down the third-base line would have traveled just inches to the right, it would have been a double and not merely a foul ball.
Well, trading is a lot like baseball. Get one thing just a little bit wrong, and it could mean the difference between money in the bank and money out the window.
I realize it��s all too easy for investors to make a mistake and get one or more of what I consider to be three critical variables wrong. I know this because I��ve just about seen it all in the trading game, and admittedly, somewhere in my long-lost trading past, I��ve made these same mistakes myself. So what are these three all-important variables, or Power Principles, as I call them, and how do you make sure you get them right in 2012?
Let��s take a look:
Power Principle #1 — Find the Right Stocks to Trade
On the surface, this is obvious. That��s because no matter how good your trading techniques are, without the right stocks, you aren��t going to make any real money. And though it��s easy to merely state that finding the right stocks is key to your trading success, it��s a quite a bit more difficult to know how to identify those stocks.
Power Principle #2 — Get Into the Trade at the Right Price
After identifying the right stocks to trade, it��s often very important to know at what price you want to buy those stocks. Sometimes, just putting in a market order isn��t good enough. Frequently, a trade is sound only when you can get it under a certain predetermined price. If you really want to make sure your trading is at a high level in 2012, be ��ber-aware of precisely at what point you want to buy a stock. The corollary is to know the price at which you want to sell a stock! — and that leads us to our third and final trading principle.
Power Principle #3 — Know Your Profit Target and Your Loss Target
When you decide to go on a road trip to a specific destination, do you check a map or a GPS unit to see what the best route is, or do you just put the keys in the ignition, hit the gas and start driving in the hope that you��ll eventually get where you need to go? We think it��s prudent to have a navigation plan that maps out your twists and turns down the road to profitable investing. To do this, start by knowing your profit target and your loss target.
On the profit side of the equation, you may want to set a conservative target of 8% above your original buy price. You can extend this price target higher if you want to be more aggressive. But when trading, there��s nothing wrong with capturing a quick 8% in one position. Of course, part of trading is getting a few picks wrong from time to time, and when that happens, you��ll want to limit your downside to just 5%. Think of this limited downside as a little insurance policy that comes via a 5% stop-loss order on all of your trading positions.
Finally, you must realize that nobody can control the external variables influencing the stock market, but what you can control is how you approach every trade. Armed with these three Power Principles, you��ll put yourself en route to winning trading results in 2012.
This article originally appeared on Traders Reserve.
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