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Monday, 16 June 2008

Stock Investment Truisms

Sharing what I read from "Winning the Trading Game, Noble Draklon", since I come from stock trading only, better remember these truisms by heart

When it comes to investing, the first market that anyone is introduced to is the stock market. Throughout your entire stock market learning experience, there are multiple truisms that you learn. These truisms are designed to make you trade smarter and show you how to manage your risk and exposure to market downturns.

The problem occurs when a stock investor attempts to apply these same truisms to futures, forex, and options trading. The following six truisms can easily have a way of backfiring on you and destroying your account. Putting these truisms in perspective and knowing when and how to apply them will make your trading experience less confusing.

Stock Truism 1: Buy low, sell high
In futures and forex you can go short as easily as you go long. Don’t have a buy-side bias

Stock Truism 2: Let your profits run and cut your losses
When using any of the risk management tools we’ve discussed, one side will be losing while other side profits. This is necessary so that you can weather fluctuations, particular on position and swing trades, and catch the largest momentum move possible.

Stock Truism 3: Quantity of accuracy is not important as quality of accuracy
When it comes to leveraged investing, you want to be able to be in as many optimum trades as possible. Constantly scalping 1 point here and 1 point there only to get caught on the wrong side and give away 20 points in one go is not our goal. Focus on getting into trades with the best opportunity for larger profits, and you won’t have to worry about being constantly in and out of market.

Stock Truism 4: You need to know where the market is going to profit from it
In the end, none of us know the future. We make our best guesses and estimates, and still we are wrong. The right money management tools act as our safety net and help make up our mistakes. As long as you set aside your ego and let your tools operate to protect you, you will find them all valuable.

Stock Truism 5: Picking tops and bottoms is the only way to succeed.
This is a variation of buy low-sell high, but it needs to be addressed. Too many traders believe there is a perfect entry and exit price, and in focusing this way they lose sight of the big picture. Often, it’s enough just to get started in the trade. Leave the timing to the timing experts and the money making to the money-making experts. Don’t get bogged down.

Stock Truism 6: It’s not a loss until you take.
This is the worst concept to bring to the futures market. Every dime you make in these markets belong to you; every loss you take belongs to you. Don’t get lulled into a false sense of security in believing that you are immune to or somehow separated from your profits and losses. Be proactive and constantly be vigilant of what you are making and losing, so you can correct it if need be.

Attempting to apply these stocks market investment truisms to futures and forex can quickly backfire on you if you are not careful. They can cloud your risk management judgment when it comes to futures and forex investing. Eliminating the dogmatic stock market approach to trading and you will find a world of doors opening to you.

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