So we have gone over entry, stop and target in the prior lesson. Here is a real world example. You might have gotten our email showcasing a $5,000 profit from our 5-1 risk reward trade in BIDU. Now you will learn about it in detail. On the day this trade was put on, we felt that through $200 Bidu could have a strong $5-10 move over the next few days, on this day, it was trading in a range of $198 to $200 during the opening session. We started small buying 100 shares, with a hard stop of $197.99, if it broke there we were out and would have lost about $100 with our first 100 shares. After an hour we bought another 100, and then finally another 100 shares. Now at this point our risk in the trade was $300.
Right around lunch time, the stock finally breaks $200 (buyers in control) within 15 minutes of breaking 200 at noon it is around $202 or a +$900 trade (3:1 trade so far). We are still confident (mental/ psychologically) that it will go higher since we know we are right. Now this is when real trading vs paper or fake trading takes over because when the stock is up, you’re the man, you know everything and it's short and brief!
Then over the next hour, the stock pulls in from $202 to $201 (now only a $600 gain), back to $200 ($300 gain) then back to our price or a break even trade. Mentally the wind is taken out of our sails.
“Why didn't I sell at $202 I'm so stupid! Why didn't I just get out at $201 when I knew it was coming back here! God dammit now I might take a loss!”
These are all questions that will run through most people's minds and that no one on TV or in a book will talk about. But what you have to remember is the ORIGINAL game plan!
The original game plan that you made with a clear head before you put the trade on, you had your entry for a reason, you had your STOP for a reason and your trade for a reason. Trades take time, you can’t force it because you want it NOW! What a bad trader will do, and we have done it ourselves (nobody’s perfect) is change or alter the game plan and in most cases for the worse. But we knew the trade and stuck with our plan and by 2pm we were back in a good place with the stock cruising back up toward highs of the day!
By 4 o'clock the stock was at $205, our price was $199 and was up $1800 when we were risking around $300 if the trade failed (6-1 risk reward) on this day alone, now by selling 100 shares for a $600 profit we know we’ve covered our risk of this trade. That's when you hear the term called "Paying for the Trade”.
(In reality we actually had a $5,000 share gain on the trade due to the fact that we had 1,000 shares to start the day and sold most, holding 300 more- but to show you a simpler example we wanted to start with 300.)
Paying for the trade - selling a portion of your stock for a gain that covers the risk (total loss) of the trade so that if the remainder of your stock comes back to your Stop price the trade will now be BREAK EVEN, instead of incurring a LOSS.
If you have a specific question about this trade that you don't understand, please ask, we are here to help and want to make sure you fully understand. No question is ever a dumb question!
Do you have balls?
In the Group chat try your best to answer these 4 questions.
- Do you understand risk/reward better now?
- Do you understand why we didn't change our stop after the stock was profitable and then came back to our price?
- Why would you want to "Pay for the Trade"?
- Can you see from this example why trading is more mental than skill?
Bonus Questions Give a real world example of when you had to risk something yourself (does not have to be monetary) but the reward was far greater and worth the risk so you went ahead and did it?
POST IN THE GAME PLANNING CHAT