Wednesday, August 02, 2006

Coaching Call Week 6

You may have noticed that last week there was no coaching call posted. I had to reschedule last week's call for personal reasons and so we picked up this week where we left off. We reviewed the money management chapter and looked over some of the current stocks I have in my watchlists.

Money management & position sizing is essential to a savvy, professional trader. While the risks associated with trading can be mitigated, any given individual trade is risky. As a trader, the goal isn't to never lose money, it's to keep the losses to a minimum while maximizing your profits. There are times when a stock will move against you, gapping up or down either for your benefit or detriment. Even if 8 out of 10 trades move in the desired direction, if the first 2 wipe out your entire account, you're done. This is why position sizing and money management are essential. By only risking a set percentage of your account (say 5-10%), you can't be wiped out on a single trade and you also will naturally diversify your positions.

I don't mean what people generally think "diversify" means. I'm not referring to diversifying your portfolio by spreading your money over several sectors. I mean to say you can diversify your positions in terms of Bullish, Bearish, and Stagnant. Since an individual stock's movement is so heavily influenced by the market as a whole, diversifying your position by spreading out your account across multiple sectors only reduces volatility. Losing money slowly is still losing money. However, you can capitalize on the market's direction by placing bearish trades or just keep your money in cash during downtrends.

Another benefit that will likely come with this sort of money management plan is that you will probably have some cash available to put into a particularly appealing trade; it's not as likely that you'll have all of your money tied up in open positions. This will leave you some available capital to take advantage of a trade that you wouldn't want to miss.

To be clear, the above ramblings are pretty much my current interpretation of things. I'd mostly credit the coaching handbook, my coach, and the teachers of the classes I've attended, but that's my take. Any erroneous or poorly understood concept can be credited to me, hopefully I don't need to apologize to my teachers.

Rob and I also talked about journaling my trades. I'm to write up some free-form text explaining my position, with an honest evaluation of my emotions at the time of the trade, etc... I'll share some highlights here in the blog, both good and bad.


LBC said...

what is the difference between the coaching program and the mentoring you recieve with your training camps?

Trader Taocode said...

You meet your Mentor in person and spend a couple days trading with him or her. You may never meet a coach in person. Basically that's the difference. With each you receive some materials to study, review, fill-out, etc... With the coaching program you receive a manual and workbook that you read, fill out and review with your coach for the first 8 weeks or so.

I'm looking forward to my time together with my Mentor and am really enjoying the weekly calls from my coach. I'm nearly half-way through the formal 16 coaching calls and it's been an incredible benefit to have a professional to look over my shoulder, so to speak, and to provide feedback and advice. The weekly coaching call is really helping me bridge the gap from theory to practice.

When I get to the time with my Mentor I hope to be competent enough of a trader to really get the most from him. For him to bump up my trading skills to the next level. Everyone has their own strategy for using these resources. Since my time is limited with my mentor I really want to be at a higher level of compentency before I meet my mentor.