Rich Dad Stock Blog
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Category Archives: Kathy Hardtke
7 Keys for Trading Success
As with any success in life, we need to follow a proven system and build character to maintain that system for continued success.
- Follow a proven trading plan: A trading plan that has been tested for consistent profits will help keep you in the profit zone and within the boundaries of success.
- The trend is our friend: Be aware of the trend. If a stock has an overall trend up, our probability for a downside trade will be reduced and vice versa. Remember everything we learn in trading is about probabilities to keep us profitable.
- If you are not sure, don’t trade: Regardless if the supporting indicators are telling us the probability for a trade is to place it, if we have reservations about the trade, don’t trade it. We need to trust our education, our trading system and don’t let our emotions play into the trade but if our gut questions the trade, don’t trade it. Sometimes the better trade is the one not placed.
- Cut losses and book our profits: Once our trade hits the loss percentage of our trading system, we need to cut our losses and get out. As successful traders, we are fully aware that we are going to lose and don’t get caught up in the individual losses. We understand the overall net profit and learn from our losses and move on. When our trade hits our profit margin, close the trade. A booked profit is money in our pockets where the glory of the profit on paper isn’t real until it hits our account. It is only theory until it is booked.
- Control our emotions: Sticking with a proven trading system will minimize our emotions. However, if at any time our emotions start to get in the way of our trading, take a break. Even if it is for weeks…get out and review our knowledge received from our education as well as our trading system so we can back on track. Emotional traders make mistakes that take us out of the profit zone and we need to stick with the system to grow our wealth month in month out in all markets.
- Trade money you don’t need: There is an emotional component to trading money we have committed to other things such as our safety net, buying a home, paying bills, etc. It makes it difficult for us as traders to trade money we have a hold on. At al times, we must only trade money that we do not have an emotional connection to with the full understanding if we lost it all, we certainly would not be happy but it would not change our lives. This helps us follow our trading system and keep us from emotionally trading.
- Continue education: We are meant to learn and expand our entire lives, we were born to grow. We need to remember that in trading this is no different. When we start to believe we have learned everything, the market will show us we don’t. Always continue education in trading, there is far too much we will never know to think we have made it.
Once we have the educational foundation, the system to follow to keep us in the boundaries of success and mentors to hold our hand as we grow, we are bound to achieve our financial goals trading. Maintain humility and continue to reach out to learn more and gain help from those further ahead trading than us and we will continue to enjoy the fruits of our labor. Happy trading!
Profits: Reinvest or Cash Flow?
Our ultimate goal is to create cash flow that covers our expenses so we can get out of the rat race and on the fast track to financial freedom. We are all in different financial places and for some with larger trading capital, the path may be shorter than those with a smaller nest egg to trade with, depending on our financial goals.
In the meantime, we have to analyze our financial situation to determine the timeline to financial freedom.
We begin by asking ourselves a few questions:
- What are our monthly living expenses? This includes all recurring monthly expenses such as mortgage, car payment, credit card payments, utilities, groceries, clothing, etc.
- How much capital do we have access to trade with? Any asset that can be converted to cash to trade will be included in this number. For instance, investment accounts, retirement accounts and savings accounts.
- What is our monthly net trading profit? In order to understand the power of our trading capital, we need to know our monthly net (before taxes) trading profit.
- Do we want to continue to grow trading portfolio as well as create cashflow? Think about our goals, do we have a number in mind we want to achieve? This will help us understand the potential timing of how long we need to reinvest our profits before collecting passive income.
- Are there any major purchases that will reduce our trading capital? Do we have kids that need college paid for? Are we planning on purchasing a new home, boat or planning that
Once we know the answer to these questions, then we can analyze what the reality of our goals. For instance, if we need $3,000 passive income to cover our monthly expenses and we are profiting 3% monthly trading, we need $150,000 trading capital ($100,000 x 3% = $3,000). In this scenario, we would be financially free trading $150,000 monthly. If that is our only goal, than we have arrived. However, in 10 years our trading account would remain at $150,000.
Remember our overall portfolio has power, the power of compounding interest (profits). The ‘rule of 72′ is a method of measuring an investments doubling time when continuously reinvesting the monthly profits. Simply stated, we divide the 72 by the annual rate of return to see how many years it will take to ‘double’ our money.
Let’s look at the power of compounding with reinvesting all our profits monthly. If we are trading $150,000 at 3% monthly, the annual profit would be 36% (3% x 12m = 36%). Following the compounding principle, our money would double every 2yrs (72 div/ 36 = 2) and simply put look like this:
- 2yr = $300,000
- 4yr = $600,000
- 6yr = $1,200,000
As our money grows so our monthly profits grow. In the above scenario looking at year 4 of reinvesting, the power of $600,000 at 3% monthly, profits $18,000 a month. Once our trading portfolio grows large enough to support our monthly expenses and profits to reinvest, we can have our cake and eat it too. We are now financially free covering our monthly expenses, PLUS reinvesting a tidy profit growing our power larger as each month passes by.
Everything we teach at Rich Dad Education is system based with a step by step plan to achieve your financial goals.
“We go to school to learn to work hard for money. I write books and create products that teach people how to have money work hard for them” Robert Kiyosaki
Tools for Successful Trading
Trading is not as simple as opening a trading account and placing a trade. If it were that simple, everyone would be rich. Instead we need to get educated and listen to those who are trading successfully making profits month after moth to learn the tools they use in their trading system that keeps them in this profit zone. Trading stock and options is an amazing path to financial freedom regardless of the amount of money you start with. However, it does require a rules based system beginning with three essential tools:
- Trading software: This tool will help us analyze the probabilities of the movement of our stock and options trades and give us the data needed to stay within the rules for profitable trading. Proper trading software will include; live feed for stock prices as they trade during trading market hours; profit/loss calculators for options trades; technical analysis charts to identify entry and exit points; various options and stock search tools to locate opportunities for new trades.
- Virtual trading: As we are learning our trading system and options strategies, this tool offers the ability to ‘practice’ before applying our capital for our trades. Virtual trading, also called paper trading, is live, real trades with ‘play’ money. It is best when learning a new strategy to apply what you learned to build confidence and understanding of the strategy you plan to trade.
- Trading journal: While we are applying our rules based system and building our trades and profits, it is wise to record all of our trades in a trading journal. A trading journal is a spreadsheet with calculations built in to track your trading progress in these areas; win/loss ratio; position sizing; type of trades that have most success; tracking the mistakes made for losing trades. A trading journal kept current will help you become a more profitable trader but understanding your weak areas you need more education in and your strong areas that you need to trade more often as well as be cautious of overconfidence in trading.
Trading stocks and options does not require a college degree or high IQ. All you need is a proven rules based system, education to learn the system and strategies, a mentor to hand hold you until you build knowledge and confidence and the above essential tools. Believe you can do it, learn how to do it, remember why you are doing it and just do it…happy trading!
Let go, embrace change and follow the stock market
In addition to death and taxes, change is guaranteed. Life changes and not too many generations ago, we couldn’t fly. In my own generation, I watched the internet boom as well as the days change from lugging our suitcases around to wheeling them easily through the airports. The stock market prices change daily but the market itself, being based on companies profit and rise and fall, changes often appear based on the perceptions and emotions of the people in the market.
When I was a Financial Adviser with Morgan Stanley, we told our clients to “buy and hold, we are in it for the long term.” This has been the same statement used by advisors across the globe for generations and still is prevalent today. The problem is, since the inception of the stock market, much has changed. Let’s look at the market over the past twenty years; it doesn’t play the same way the previous twenty years did. Where Corporate America was growing and the baby boomers were dumping tons of money into the market and pensions were flush, we were growing year after year. Long term gains overwrote short term losses. The internet boom in the 90′s was one caveat to the change in the market but there were others.
Let’s look at the facts: take a look at the SPX (Standard & Poors Index), you see the market went up and down but was overall moving upward for the first 12 years and this had continued mostly since the stock market crash of 1929.
Then some real life changes happened late in the 20th century moving forward:
- CORPORATE AMERICA was growing and at least for now, how big can Walmart grow? Certainly we can look at new companies that are up and coming from growth but in our current economy they are fewer and farther between compared to the mass industry expansion in the 20th century.
- BABY BOOMERS were the largest generation to date. We are fully aware that they are at that age of retirement and plan to conserve their wealth to live on. Because of preservation plans, they are pulling money out of the market month after month, as they shift to less risk, less reward in assets like bond’s and cd’s. These type of assets focus on wealth preservation but often do not keep up with inflation. The stock market needs money infusion to grow. For now, a large number of dollars are coming out of stocks and mutual funds filled with stocks, daily.
- OVER LEVERAGED AMERICA caused us living in “phantom wealth” until the bubble burst, causing the mortgage crisis, a loss of jobs, a financial meltdown causing America and affecting the globe creating less money in our pocket and less money spent in the companies that grow the stock market. Although we are coming out of the woods now, this is not a fast process and will take time to turn the “Titanic” around.
This all sounds so negative and to some it may be, but for those of us interested in following the market and learning the strategies necessary to capitalize on the movement of stocks in this economy, this is great news. Take another look at the above chart on SPX and what do you see? Up, down, up, down in larger movements. For those of us willing to let go of the past, embrace change and learn how to make money in the current environment, there is an opportunity to not only do well today and moving forward, but to excel financially. Happy trading!
Learn From Your Mistakes
Once we learn the strategies to trade options and stocks, have a proven system in place and feel we have a solid trading plan and some successes behind us…it is time to watch out. Humility is our friend and no matter how great we become as traders, we will always make mistakes.
There are three keys to remember as time and success builds:
- Be humble enough to admit we made a mistake
- Be coachable enough to learn from our mistakes
- Review your rules, reassess and apply as necessary
Typically with a good trading system in place, we will maintain consistency. For instance, maybe we are a 70% trader where 7 out of 10 trades are typically winners and three are losers. Certainly with our system we know when to ‘book’ our profits as wells as minimize our losses to keep us in a positive net trading profit. Even with a good set of rules in place keeping us in non-emotional trading, our egos like to sneak up on us and try to take control of our trading choices. for instance, let’s say we’re having an exceptionally good streak of trading wins and our egos start to think, ‘maybe I got it going on and got this trading thing down.’ ALERT: This is the time to beware and is often the time we give back much of our wins. It may even be a good time to take a break, stop trading, for a few days or weeks, to pull ourselves back together before trading again. Sometimes the best trade is the one that was never made.
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roven rules-based trading system is meant to keep us in the profit zone of larger gains than losses and away from the emotions of trading. It is like when we were kids swimming at the public pool. There was a shallow end and a deep end. They were separated by a rope with floaters to keep us in the ‘safe’ zone of shallow water and warn us when we were getting in too deep. A rules-based trading system serves a similar purpose. Regardless of how educated we get or how long we have been trading, we must, must, must stay within the boundaries of our rules to keep us in the profit zone. It is for our own good, for our safety profiting in all markets. The most successful traders are not the ones that have the highest IQ but instead are coachable enough to learn a rules-based system and stay within the boundaries of the system, month after month and year after year.
