Tuesday, October 24, 2006

Successful Speculation Rules - The Small Loss

Achieving success at speculation is a matter of (almost) always obeying your speculation trading rules.

The least understood successful speculation is the small loss.

Every investor hears stories about the huge profits won through a successful speculation and dreams off pulling off such a coup themselves. They never quite give themselves the opportunity for a huge speculative win because they don't have rules that allow them to reach that level.

It comes down to speculation rules like the ones on those wonderful small losses.

Psychologically it is hard to take a loss and walk away - most people won't do it. It is no coincidence that most people also lose when they invest. The standard response to a small loss is to hang on hoping you will get back to even. Unfortunately sometimes that happens - that is just encouraging enough to teach folks that it was right to hold on and hope. Then it is just a matter of time until they hold onto the wrong investment for too long and lose all their money.

While they were waiting for that first investment to come back they may have missed successful speculations that could have made them nice profits.

Plan your trade before you make it - than follow your trading plan.

If you reasoned your risk at 2% before you pulled the trigger - there is no reason to have a 10% stop loss built in. Even worse is not knowing your risk and mentally planing to get out if things "get bad." Worst of all is thinking how much money you will make and having no idea of what to do if the trade goes against you.

Simplistically, think of making ten $100.00 speculations and you lose 3% on nine of them - and get out. You have lost $27.00 of your original $1,000.00. If the tenth one doubles or better - you clear $73.00 on the whole venture. Now do it again next month.

Notice that you spread your risk, you cut your losses short, and you let your profit run. Those are some of the speculation rules - like the ones you can use to plan your trades. (I'm writing an in depth e-book on the speculation rules - it should be available before year's end.)

The key to the successful speculation was all those wonderful small losses. A small loss is a successful speculation - it allows the big win. You should be able to do better than one big return in ten - but you can do well with that.

Small losses are just one part of successful speculation.




When investment leverage is used money can be lost in an instant.

2:03 PM  

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