Great article submitted by one of my readers: http://www.foxbusiness.com/story/personal-finance/things-need-know-market/
Very good things to keep in mind and they are all important pieces of the long strangle strategy I use for trading. Let's take a look ...
1) Diversify My goal is to try and never put more than 25% into any one trade. Even if there's an amazing trade out there I won't play it if it takes me over a certain percentage of my account. Now on the smaller account I have to fudge that a little and I try and keep trades under 35%. But the target should always be 25% or less of the total account value into each trade.
2) You don't lose money until you sell This was a lesson that took me a while to learn. One point where you have to take your emotions and put them in the closet, or they will cloud all judgement. The advantage I talk about with the way I do strangles is time, time, time. I'm buying out 4-6 months, and sometimes in that time period the play will reach 40%+ loss. At that point emotions are screaming "Get out!!". But a couple months ago I took some trades (this is why you paper-trade, paper-trade, paper-trade!!) that we severely underwater and just let them sit. There were 3 of them all at the same time that were down 40-60%. EVERY SINGLE ONE turned profitable at least two months before expiration. So the moral of the story is, buy time and use it!
3) Be carful who you trust There are a lot of people out there spouting opinions, including me. The temptation is to see some trade somebody is talking about and go play it. I have learned not to fall to that trap. DO YOUR OWN HOMEWORK! Don't even trust me. I'm putting my trades out there to get the creative juices flowing, and give some ideas. DO NOT make trades without fully understanding how they work! Again paper-trade, paper-trade, paper-trade. It's the cheapest way to learn ... free. I'm not saying re-invent the wheel. Take ideas from other traders and advisors, but own them, change them, and make them your own!
4) Concentrate on what you can change, not what you can't As the article states, even Warren Buffet can't change the market for long. The market will do what the market wants to do, whether it makes sense or not. What you can change is where you're standing when the market moves. That's why I pick volatile stocks and then stand on both sides (strangle) the stock. I want to be standing in the way of progress no matter which way a move goes. I can't tell you how many times I've had stocks reverse or go "the wrong way" and ended up making more money because of it.
5) For long-term money, don't check in every day At first I though this was a mute point because I do short-term trading. But then I realized it still rings true. The strategy I use is designed to largely babysit itself during the day. So, the principle still holds ... don't check in every hour. Just let it do it's thing! When I start constantly checking trades (especially starting out) emotions quickly become involved. I've slowly been training myself away from that, but I still resist the urge to constantly check my trades. I have rules in place and constant monitoring will not change those rules. If it helps put in some text massage alerts so you can be notified if something major happens on a trade. Sometimes that helps me to back off.
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