Over the past twenty years I have written millions of words about trading. There are certain themes I repeat regularly with hope the concept will sink in, be embraced, and help to improve trading and investing results.
Several traders have told me the concept they have incorporated into their trading that has been the most valuable to them is a very simple idea: focus on keeping accounts as close to highs as possible.
That is easy to state, but it can be very difficult to implement. It requires strict discipline and an unemotional approach. But when you focus on doing this, it has tremendous benefits.
To keep your accounts as close to highs as possible demands two very basic things. First is cutting losses quickly, and the second is not letting a big gain disappear. The easiest way to get in trouble is to give a favorite stock too much room before you sell it. Rather than dump Apple (AAPL) when it breaches an important threshold, you hold on and tell yourself that it will come back.
If you do that with enough stocks in a bad market, soon you will soon find that you are far below your high-water mark. There is nothing more unproductive in trading than having to make up losses, realized or unrealized. It is far better to sell something aggressively and buy back higher if necessary than to sit and do nothing as it downtrends.
A second easy mistake to make is to fail to take profits on a big winning trade. Rather than "ring the register," you become greedy and hope for more. If you are focused on keeping your accounts at highs, you are more systematic at taking profits and not letting them slip away.
Everyone that has studied finance just a little is well aware of the power of compounding. Usually, in the investment game, it is illustrated through the long-term holding of an individual stock, but it applies equally if you simply keep an account close to highs all the time. It doesn't much matter what the make-up of that account might be. It could be dozens of different stocks that turn over all time. You will benefit from compounding when you keep accounts close to highs, because you have a bigger base for returns. It is the same dynamic as holding a single stock for the very long term.
There are a number of unintended benefits when your focus is on keeping an account at all-time highs. In addition to compounding, there is also the benefit of controlling risk more effectively. If you want to keep an account at highs, you don't put all your capital on green and then spin the roulette wheel. You do a much more effective job of comparing risk to return.
The biggest benefit of a focus on keeping accounts near highs is that when you have a bad trade, you will be inclined to get out of it quickly before it can do more damage. You will make some poor sales when you do that, but that is a much easier issue to fix than having to make up some big losses.
I don't know what the market is going to do in 2019, but I do know that if you focus on keeping your accounts close to their highs you can't help but do well. All you need then are some good stock picks and you are sure to have a good return.
