Trading Mindset

Are you ready to be a Full Time Day Trader?

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It is very important to have an established trading plan, rules, and a back-tested strategy.  Many new traders get caught up in the glitz and glamour that are often associated with professional/successful traders.  The new traders forgot about the learning process and the amount of time needed in order to perfect a strategy. Poor preparation leads to failed results from a skewed reality of trading. As you know Theprofitroom is pro-education! It’s a proven fact that the proper training shorten learning curves.

Too much debt.  The Key is to be debt free! as in no car note, student loans, credit card or even a mortgage debt.  You want to be at ease when it comes to trading because financial obligations can easily burden and hinder your trading performance.  The stresses of trading is one thing but stress under the pressure of a “need” to perform is another thing.

Savings.  You need about 2 years minimum savings! I would advise 3.  Savings in case of emergencies, medical, or if your car got towed etc. Savings to help cover your basic cost of living expenses, such as a cell phone bill, groceries, a place to live etc. Savings just in case the first year of trading full time is absolutely horrific! You will need a cushion in order to give your mind some peace and to transition properly without the pressure to perform.

The recommendations above are conservative/ not factual but rather subjective depending on the person.

How to determine which markets to Day Trade? It all depends on your starting capital as well as the knowledge and information you are exposed to. Day Trading Forex: You can start with $50! Seriously, there are many forex brokers with a low capital requirement when entering the forex markets (but please make sure you perform your due diligence) Not all forex brokers are legitimate. Day Trading Futures: Most future Brokers will allow you to start with $500-$1000. The futures market moves extremely fast and your skills will be tested! Day Trading Cryptocurrency: This is a low entry barrier market as well, you do not need a lot of capital to get your feet wet!

25,000 :: In order to day trade you will need 25,000 in your account, at all times if you are trading Stocks or Options in a Margin account! This rule is a FINRA (formerly National Association of Securities Dealers, Inc. or NASD) You can read more about this rule on Wikipedia and various financial sites.   We know that there are brokers like CMEG which will allow you to day trade with no PDT rule (money under $25,000 :-), they are registered with the IRS and insured by Loyds of London, which has been in business for over 330 years.  Trading with under 25K is optional to the individual but realistically it is like funding any other start up business–you need the Capital.  Many times traders fail because they are under capitalized.  Same thing applies for other start-up companies. There is a difference for someone trading with less than 25K living in their parents basement/home or have a secondary source of income than for someone else with NO CRUTCH trying to achieve success as a full-time trader.  Just know the difference and come to the day-traders world totally prepared.

Pay Yourself First!

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Trading should be treated just like a business. From an employee standpoint it is standard to receive paychecks, whether weekly, bi-weekly etc. From a professional trader’s standpoint we want to treat trading as the business with the expectation to receive a weekly paycheck.

The Team at The Profit Room makes it a routine to withdraw trading profits every 7 business days, while retaining the same account balance. Creating the habit of paying yourself first forces you to realize and reap the benefits of true trading success. There is no real reason to have an extremely large account. Large Accounts without discipline can put you into a situation where you are able to over leverage, double up or down, and just simply add to losers because of the “excessive” amount of capital available. This is damaging in itself due to large risk exposure which leads to larger losses.

Let’s say you started with an account of $30,000 in capital in the Equities Market. The broker provides you the 4:1 leverage, if you are applying for a day-traders account. With this account you have the ability to day trade and swing trade. It’s imperative to have a strategic approach, which involves a trading plan that includes risk/money management. A true winning approach allows you to withdraw your trading profits weekly. Profits of course will vary assuming that A.) You are Profitable B.) You are Consistent. meaning if you have trading losses within days of that week, you are still able to end the week net positive. This thought process is logical, and achievable and should also apply if you are trading the Forex or Futures market with $3,000 in capital. The profits will vary but the withdrawal frequency should remain the same. The concept is to Pay yourself first while retaining the same balance in your account, never adding because you are consistent and profitable. If you have to add to your account, you are obviously losing money and never really mastered the art of being able to trade profitably.

If you are only swing trading, pay yourself bi-weekly or monthly. Most swing trades last an average of 3-5 trading days.

We’ve mentored traders who are now professionals. One Trader in particular traded with a large account and suffered from massive drawdowns. It stemmed from a desire of wanting to have the ability to have 10-15 contracts trading futures, or $5-$10 lot sizes in Forex. The desire to trade large size consumed this trader rather than the thought process of paying one’s self first. After further evaluation this trader finally came to the conclusion to only have no more than $10,000 in their account trading futures. Although this trader was trained by us, the initial greed and inner thoughts we have no control over, but the skill that was mastered for this trader to bounce back and continue to profit is the only thing we can take account for.

Always remember Trading is a business treat it as such.

~ The Profit Room

Do You Want Increased Profits? Then Go After Decreased Losses!

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I’d like to share with you a frequently overlooked source of profits from your trading. It’s a simple concept yet so very important if you expect to be able to continue trading for any length of time! The concept is that of controlling both the number of losses you have and the dollar amount of those losses. I realize that statement sounds so obvious that you might be tempted to put this article away in favor of a night of Netflix, but please stick with me here. I’ll share some things with you that you probably don’t expect to find here!

To better visualize the concept I’m describing, picture a large washtub, the kind you probably remember from your childhood. Now imagine the difficulty of filling the washtub if it has several ‘six-inch’ holes in the bottom! No matter HOW MANY garden hoses you have filling it up, the water is running out faster than it’s going in!! Now imagine plugging each of the holes, one at a time. Plug the first one and the difference is almost imperceptible. Plug the second hole and you begin to notice that there is less water splashing on the ground. Plug the third and you actually may see the water level in the tub begin to rise … just slightly, perhaps, but rise nonetheless! Plug ALL the holes but one and the difference becomes measurable! Now that you’re down to one hole, let’s begin to repair it a piece at a time. First we cover HALF the hole … while the tub still leaks, you can now tell there’s more water going INTO the tub than running out the bottom. Patch half the remaining leak and you begin to adapt to the idea that it’s OKAY if a little water comes out, just as long as there’s more going in than coming out!

Our trading accounts are something like that. Most new traders have HUGE trading account “holes” and the money is draining out faster than they can replace it! No matter how profitable they are on some of their trades, they just seem to give it all BACK! If we’re smart about our trading when we notice that, we’ll STOP trading until we find the challenge and FIX it! What I’m describing are the DIRECT results of FOCUSING on the profits and almost totally forgetting about controlling the losses. There are many reasons for that but despite the reason, the results are the same. Left unchecked, such a situation will take us totally out of the trading business in a very short period of time! Does this describe you and your trading account? Would you like to know how to ‘FIX’ it? Let me share with you four RULES for trading which directly address losses and if followed, can ‘plug’ many of your profit leaks!

RULE 1. Wait for the stock to CONFIRM the anticipated direction before entering the trade

This rule can decrease the NUMBER of losses you experience. As simple as that sounds, it’s one of the most often violated principles of good trading habits. So often is this rule broken that we are all familiar with cute little descriptions such as “catching a falling knife.” What you use for this confirmation is your own affair; price rise or fall, momentum, frequency of trades or bid / ask “size” are just a few ways. Personally I combine them all (more or less), developing a ‘feeling’ about the confirmation, rather than a measurable quantity. However you choose to define confirmation, let experience be your best teacher here and do NOT enter the trade until you’re convinced the stock is moving your direction!

RULE 2. When you are filled on the entry, place a STOP loss to minimize your potential for loss.

This rule controls the AMOUNT you can lose on any one trade. I like to use about 1/2 of the stock daily movement for my stop loss amount. For example, if a stock price moves on average, say $1 every trading day, then I’ll back off 1/2 of that, or 50 cents and place my stop loss there, limiting the losses possibly incurred on that trade. Whatever you use, be FAITHFUL in adhering to the protection afforded by the stop. In other words, DON’T CHANGE IT. If you’re stopped, you’re stopped. He who trades and runs away lives to trade another day!

So much for minimizing the NUMBER and dollar amount of losses. Equally important is allowing your profits to maximize AT THE SAME TIME! Here’s how to do that.

RULE 3. When you become profitable in a trade, replace the stop loss with a TRAILING stop, trailing by that amount of profit.

Say you’re up 25 cents in a trade and you have your stop loss in at 50 cents below your entry (on long positions). Replace the stop loss with a 25 cent trailing stop. At THIS point, you’re WORST CASE outcome for the trade is BREAKEVEN (give or take a couple of pennies)!!! You have virtually NOTHING to lose and EVERYTHING to gain from that point on!

RULE 4. Leave the trade alone from this point on!

The market overall will do a much better job of managing the trade (with the above rules observed) than you or I EVER could! Once you’ve reached the MAGIC POINT in your trade, just go away and do something else. Your trade is on autopilot!

The Profit Room

 

 

Lack of a Trading Strategy

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If you know the pitfalls of trading you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.

Although trading involves risk, never treat it like gambling. You must have a solid trading strategy, one which you plan, test, and revise repeatedly. You need to stick to this strategy, and never act on spur-of-the-moment decisions. All you do when you act on a gut feeling is jeopardize any and all of the thoughtful planning you’ve done by giving yourself completely over to chance. Remember that you can never control where a single trade will end up, but you do have control over a long-term plan.

And don’t evaluate your performance on the basis of individual trades. A gambler might think that a small loss is a failure while one huge risky gain means success. Traders should never think this way. Instead, judge yourself by the consistency and profitability of your overall strategy. This is the only way to stay in control of your trading success.

To do this, of course, you have to build a solid strategy. This means developing a set of pre-defined rules that you follow consistently. You should set goals for each week, or possibly each month (but never for a single day, as there are too many things you won’t be able to control over such a short period of time). Next, decide on realistic profits and losses for each trade. Then, according to these markers you’ve set for yourself, carry out your plan without exceptions.

If your set profit for a trade is, say, $300, sell when you reach that milestone, even if you have a feeling the stock will rise. Otherwise, you corrupt your plan with too much risk, and you’ll never know if your overall strategy was successful or not. You may have gotten lucky with one trade, but you haven’t determined any kind of consistency.

Keeping to a strategy will allow you to revise what you’re doing, learning which goals and limits will work and which won’t. Straying from your strategy teaches you nothing useful that you can apply over the course of your trading career. So, while you may gain a few hundred, or even thousands, of dollars on a single trade, who knows how much knowledge you sacrificed, knowledge could have gained you tens or even hundreds of thousands of dollars in the years to come.

The Profit Room

 

Why Learn to Trade Stocks?

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Stock trading has numerous benefits as a viable part time occupation.

In contrast to a second job, there are no special qualifications to begin. The stock market doesn’t care about your level of success, education, ethnic origin or any personal characteristics. Complex employers, office politics or difficult employees do not play a part in trading. Additionally you have the freedom to trade from any location. If you follow a few simple rules you can run your business on your own terms.

The most important factor is to be clear about why you want to trade stocks. What do you hope to gain financially from learning to trade?

Are you looking to:

1. Create an enhanced lifestyle with supplemental income?

2. Replace a full time income with a passive income stream?

3. Become independently wealthy by creating a financial base independent of other income sources?

What would being a successful trader mean you? Imagine yourself making successful trades and gaining financially. Think about what it would feel like to have extra money in your bank account and to achieve your targets. With a clear picture of what you want and how that would feel you will be able to remain focused and motivated.

Your first task.

Your first task is to put one primary goal for your trading plan in writing. Additional goals you set can then support your primary plan.

Know Yourself

As well as learning to trade stocks it is essential that you understand yow you react under stress. Being aware of your own behavior patterns and common causes of and reactions to stress when trading will help you to master stock trading.

The reason that many people lose money in the stock market is because they lack the proper knowledge base. Independent of trading styles there is one thing common to all successful traders; the use of a tested and proven system.

In learning to trade you must be willing to let go of pre-formulated ideas and start fresh, develop new successful habits, and the discipline necessary to trade successfully over time.

Are you willing to do this?

Successful stock market trading eludes many people because they don’t have contact with an experienced, successful trader or trading system that actually works. Going it alone can be potentially expensive when learning by trial and error. Investing in a solid education and taking advantage of the insights and experience of successful trader makes a lot of sense when learning to trade successfully.

The Profit Room

 

Control Your Emotions, Succeed in Trading

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Why is it that some people are successful in trading the markets? And why is it some people fail? Is it luck that determines if you are successful or not in making money from the market? Is it the system or strategy that a person use which determines their success?

A lot would say that it is the system or strategy that they employ which ultimately determines if they come out winning from the market.

Every system that exists on the internet will show you how to make money using it. Without a doubt, it will make money for you. The question is usually how much money will the system make for you. All the systems that are out there will show to you how their system has worked base on historical data or activity and then at the bottom of the page there would be a disclaimer clause that states ‘.. Historical data does not determine or guarantee future earnings….’

So why is it that these sites or page include this disclaimer clause?

The disclaimer clause is incorporated in it because they know that there are certain elements which they can not control. Human emotions.

Human emotions are always the key to either success or failure in any business. And it is no difference when trading the markets. Read all the books about trading that you want, buy all the successful system that you want. If you can’t control your emotions, you can’t succeed in the markets.

That’s the reason for the disclaimers clause because the one thing that the author can not control is their subscribers or customers emotions.

In the market there are but only two main emotions that every trader will experience; GREED and FEAR. When this emotion appears it is not how we eliminate it but rather how we act on it. There are natural emotions that can not be eliminated. This emotions forces us to action, thus how we act on it will determine the outcome.

Like anger, when we are angry at someone, it’s either we say something nasty or we can just kick a bucket or we can just dive into a pool of water. Which ever action that we take, it produces a different outcome or result.

All too often when we begin to see two to three consecutive loses on our trading activities, we would begin to have doubt. When this happens we are already at the state of fear, we fear losing more of our money and thus begin to doubt that the system is working.

While no system is absolute, meaning no system will guarantee that you will make money ALL the time. The system seller would say that we would be able to make money consistently, provided we follow their system to the dot.

On the other hand, when we begin to see two or three consecutive we begin to feel on top of the world. We begin to feel that we can start making good money from the market and then start tweaking the system or maybe putting more money in the market to leverage our earnings or maybe begin to take on more positions, which ultimately make us deviate from the system which we were using. This is when greed has already stepped in to rule our thoughts.

There is saying ‘The system is only as good as the person using it’. So if we don’t follow the system either with we are making loses or when we are creating profits. We would ultimately fail. And to follow the system requires discipline. The discipline to act on our fear and greed when it sets in, will determine how well we do in the market.

Once again discipline is the key. We must have the discipline to say ‘I have reached my target. I should take profits now even though it may go higher’ when greed sets in. And when fear sets in one should say ‘I have to take a position even though the market does not seem to be moving in my favor’

While these are but two circumstances when greed and fears arises, there are, and will be many instances when we need to make a decision to either enter or exit the market. And these are very two most important decisions to take in order to succeed in the markets. The discipline to follow the system diligently no matter what happens to the market

So no matter how good the system is, the only and sure way is to lasting success in the market depend on the discipline to overcome our personal emotional to follow a particular system religiously.

The Profit Room

 

Trading Expectations

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As we all know, when we open a trade, we look forward to it being a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. However, we trade to make money with a proven strategy. The Profit Room’s strategy allows you to be confident when you place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.

If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results.

How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:

Net profit = amount of money won – amount of money lost

Win rate = number of winning trades / total number of trades

Lose rate = 1 – win rate

Average winner = amount of money won / total number of winners

Average loser = amount of money lost / total number of losers

Average reward / risk = average winner / average loser

Expectancy per trade = win rate x average winner – lose rate x average loser

Or, alternatively, expectancy per trade = net profit / total # trades

Expectancy per month (profit forecast) = expectancy per trade x average # trades per month

Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1

Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades

We hope this information helps you in determining your expectancy rate of trading.

The Profit Room 

Emotion In Investing

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Humans are all emotional being. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all cost.

Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google’s search engine so much that you decide to buy the stock  without doing any research. You figure that Google’s search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.

The next question is how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotion for a second and think clearly. Sure, you’d like to have a Mercedes in your life. It is luxurious and have a lot more fancy features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.

Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don’t over pay. You invest in Google to profit from it not because you like its products.

So, how do we eliminate emotion from our investing decision? We can’t eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. Fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B.

For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. This is a fundamental approach to long term investing.

Emotion is hard to ignore. We are not immune to that. But following your emotion will cost you a lot of money. Just watch those investors who buy the peak of a stock. Don’t follow the herd and keep your focus on the fair value of your stock. You will do really really well.

The Profit Room