At a recent morning meeting, I mentioned to a colleague that my sell discipline was to reset my sell stop to the original entry price once I had a position that was up 50% (this is the discipline for a particular service I trade) Within the next couple of days, I was long in a put on Cooper Industries (stock symbol COO) and was fortunate to have a 50% gain on the position. My colleague emailed me to remind me to reset my stop loss at a 0% gain. I did it. Soon afterwards, Cooper dropped even further and I exited half of my position at a 100% gain and reset a sell stop at a 50% gain on the other half of the position (also part of my original plan). A few days later, Cooper was up and the second half of my put position dropped from a 100% gain to a 50% gain and I exited the 2nd half of my position with a 50% gain. I got out of the position with a large net gain. In the next couple of weeks, I saw the put's value drop close to zero. But luckily, I was out of it. The point is, my colleague reminded me to do what I had planned to do from the beginning. His reminder refocused me and helped me to achieve my objective and helped me remain clear-minded also. The result was great!
The Buddy System
We analysts at Big Trends have a buddy system in which each analyst has a partner with whom he joins with for purposes of accountability, discipline, and fresh ideas. This system is highly effective. We believe this system increases profit and prevents many serious errors in judgment and discipline. We recommend you do the same with someone you know who trades, or perhaps someone who doesn't trade at all. The first step in this system is to explain to your “buddy” what your buy and sell discipline is. This first step is very illuminating. Many traders find that their original strategy becomes more well- defined, while other traders realize that they never had a clear plan to begin with. Remember, that the ego typically desires to be free and to have more discretion when it comes to trades. But, the objective of trading is not to massage one's ego. The objective is profit. If the system is most effective without discretion, then so be it. We use the format below to describe our strategy and discipline to each other.
- Specific Criteria Necessary to Open a Long Position
- Specific Criteria Necessary to Open a Short Position
- Once a Stocklist is Formed w/ the Proper Criteria, Here's How I Choose the Stock
- Specific Criteria To Exit a Long Position
- Specific Criteria to Exit a Short Position
- Any Stop Strategies (For Example, Entering, Lowering, and Raising Stops)
- What Must Happen for me to Change My Strategy
- How I want Feedback and How Often
- What Dates and Times I Want To Meet Regularly
The next step in the buddy system is to have regular reviews. But what do you talk about during your reviews? Use the following template to review your buddy's trades and to have your trades reviewed as well:
- Did the analyst follow his rules for entry? If not, how so?
- Did the analyst follow his rules for exit? If not, how so?
- Did the analyst follow his rules for stops? If not, how so?
- Did the analyst change his strategy? How so?
- Any new ideas to share with the analyst?
Use this buddy system and have a review at least once a month if not more often. Sometimes it helps to have a partner when it comes to discipline. Be disciplined, and trade well!
Price Headley is the founder and chief analyst of BigTrends.com.