Trade Stocks Like a BuddhistBuddhists simplify, and strive to eliminate pain and suffering. Noble goals for an investment strategy. Here are 2 rules to do just that:
1) Define your system, and stick to it.
When you second-guess your system, or bend its rules, the outcome becomes your personal responsibility. Your self now is exposed to the possibility of pain. Isolate your self from your trading system.
Follow your system methodically, without fear or recklessness. Fear, hope, greed, emotion, rationalization, hesitation, anticipation, expectation, distortion, and spin are all part of the self, not market reality, and must be removed from your trading system.
The market is objective, not subjective. It does not know or care who you are, how you interpret its information, or what your expectations are. It is an outside force, interacting with your trading system, not with you, as self. Your trading, and your system, must be objective.
Do not fight the market. Anything can happen, so be prepared for anything, accept what the market is telling you, and expect nothing. No system is perfect, and all will experience losses. Losing money and being wrong are sources of pain. Once you accept the truth that anything can happen, you cannot be wrong. Accept losses as complementary outcomes; They are Yin to your gains' Yang. Yin is necessary to experience Yang.
This is especially true while in a trade that moves against you. The self can distort information to suit its goals or fears, and to avoid pain. Don't allow the self's pain-avoidance mechanism to shield you from information. Accept the move, and act, if your system's rules dictate action. Let your system work within the flow of reality's information, not the illusions presented by the self's pain-avoidance mechanisms.
Be unbending in your rules and accept every outcome. Traders are destined to fail when they bend their rules, refusing to accept the outcome.
2) Your system must include a stop-loss rule.
Pain and pleasure are non-linear. The pain from a large trading loss far outweighs the pleasure from a large trading gain. Isolate your self from large trading losses by keeping the losses small. It is imperative that your system have a stop-loss rule to limit losses and reduce pain.
Gains and losses are non-linear. A 5% loss can be offset by a future 5.3% gain. A 50% loss must be offset by a future 100% gain, which is extremely rare. Many accounts implode, unable to recover, because the trader let small losses become large losses. Move your 5% loss into a better opportunity for the 5.3% gain. Repeating: It is imperative that your system have a stop-loss rule to limit losses. Consider our Optimum Stop-Loss Calculator
Bonus Rule: Buddhists don't catch falling knives. Leave that to the ninjas. Most ninjas trade until they fail.
Note: This is not a recommendation to use any CrystalBull model as your trading system. The system you use is your responsibility to determine. Consider using multiple tools in your system.
Portions of the above were inspired by: Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude, by Mark Douglas. This book is on our recommended reading list.