It’s that time of year again, the time when the 16 NHL Hockey teams with the best records compete to see who will make it to the 2012 Stanley Cup.  The prize:  The deep gratification of knowing your name will be engraved on the cup.

Last week I took my wife to watch the Nashville Predators take on the Detroit Red Wings in a playoff game for this coveted Stanley Cup.  The energy at the beginning of the game was electrifying!  The sold out crowd at the Bridgestone arena was loud enough to be heard 3 blocks away!  As the Preds took the ice, it was clear they were out for blood against this archenemy division rival.

It was only about 10 minutes into the game when the energy started to disappear as the Red Wings made the first goal of the game.  From there, it was downhill.  By the middle of the 3rd period the electrified excitement of the attending fans had turned into disbelief as the once hot Predators played in a fashion simply not worthy of a Stanley Cup playoff appearance.  Opportunity after opportunity the Preds just could not score.  They missed passes; they wasted power plays.  You could not script a better scenario for a bad game.

Then my wife made the most brilliant comment.  She said “you can move in the right direction but if you never score a goal you still lose.”

Maybe that doesn’t appear like the most brilliant statement, but it really made me think about how many people in life are the same way…moving towards the goal but never scoring.

Everybody desires success.  I’ve never met someone who says they would prefer to be a loser.  However, the crazy thing in life is how few people achieve what they really want.  It’s not because they cannot achieve it, but rather it is because they get so close, and then give up.  Or, because they are moving towards their goal, but they never finish.  As my wife said, “You can move in the right direction, but if you don’t score a goal you still lose.”

To be a successful trader, it’s not just enough to show up for some classes and learn about the stock market.  It’s not enough to set up a brokerage account and send in some funding.  It’s not enough to even go place a trade.  Success is built upon a strategic approach.  One that includes the mental and knowledge-based preparation, as well as the physical action.

The way we teach you at TradeSmart, our basic classes provide the knowledge.  You learn a lot of mental characteristics of success as well.  But to take the physical action we encourage every student to walk through the trader conditioning system over and over.  That means:

• You drill your analysis skills using instant replay in Trade Navigator
• You practice your ability to pull your trade setups together
• You work through virtual trading with fake money to really condition your response to various market scenarios and get use to applying various strategies
• You finally place real money trades.  (But only after you are prepared)

It’s not enough to move in the right direction when you want to be a rock star trader.  To be the successful trader you must pull the entire game plan together.  The knowledge, the mindset, the skill set, and of course, you must SCORE!!!!

So how far does the common good take us?  Well just recently in the news our tax dollars have gone to help a useless solar company known as Solyndra (only about $535 Million).  And then there’s the $111 million the government gave to the city of Los Angeles for the ARRA program that was to create jobs – LA managed to create a whopping 54 jobs.  And of course we all know about the GSA (General Services Administration) wasting over $800,000 in vegas.  Oh yea, let’s not forget the government funded Secret Service agents who were caught spending money on hookers in Columbia (in all fairness it was only $47, probably not the demise of our fiscal structure).

We don’t have to look far to find government waste and useless expenses.  On tax day there’s not too much more infuriating than the realization that our money is going to pay for those programs.  Unless of course, you don’t pay taxes!

What?  Can this be?  YOU, not pay taxes?  Well of course not you.  Anyone reading this blog is probably one of my students so I’m certain you are all paying more than your fair share.  However approximately 49.5% of American’s actually look forward to tax day.  Why?  Because tax day is the time when the government pays them all their prepaid tax money back.  That’s right, nearly half of American’s pay NOTHING for taxes!  The number is actually about 151 MILLION individuals who pay virtually nothing to live in this great country.  (http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/)

The most infuriating part of tax day for a person like myself is to sit in a coffee shop (as I’m doing right now) and realize that 1 out of every 2 people I’m staring at did not have to pay taxes today.  And I’m staring at a tax bill (over and above what I’ve already paid this year) large enough to take at least 3 more people off the street with a full time salary (and that’s a taxable salary, none of this $15k/year crap).

Now here’s the greatest irony – Our business provides jobs for 9 full time families now, and at least twice as many part time workers who help support their families.  Do I get a tax credit for such a wonderful service to our community?  No, instead I get to pay more taxes.  And every employee we add also means we get to pay more payroll tax.

So why am I so infuriated today?  Well it’s tax day for starters.  Secondly because we SHOULD ALL BE INFURIATED!  The fact that our government has made it to the point where 1 out of every 2 people do not have to pay any tax, and the rest of us carry the entire burden for everyone else – well that’s just crazy.

Now obviously I’m not the only one who feels this way.  So does our beloved president, who of course understands the every day common man (and woman).  So his proposal: make the wealthiest among us pay more.  We’ll name it after Warren Buffett, after all he supports it!

And there my friends is where the Buffett Rule comes from.  In short – if you make more than $1 million/year, you get to pay more.  Brilliant!  The reason?  To help pay down the national debt and “get our spending under control”.

Uh – hello!  Taxing doesn’t stop government spending, it stops cash from flowing into the economy!  DUH!  Are these politicians really that dumb?  The answer is NO.  They are not dumb.  They just have a different agenda.  It’s obvious that the real issue here is not taxation, it is class warfare.

In other words – let’s keep hating the rich.

Well now I’m one of those rich and I care a heck of a lot more about it than I did when I was broke.  I was never one of these people who would sleep in a park to insist on taxing the rich, I just didn’t think it mattered.  But now that I’m on the other side I realize that it not only matters, it’s about the most destructive thing that can happen to our country.  Tax the rich?  Really?

Again – who creates jobs?  Let’s see… government… solyndra… $500 million loss.  Contrast that with TradeSmart University:

• We started our business when the economy was at the bottom (no one said it should work)
• We have never taken 1 penny in government assistance (it’s never been offered, but we wouldn’t have taken it if they had offered)
• We have provided 9 families full time employment, and expect to double by the end of 2012/beginning of 2013
• I personally take less salary than the president, yet pay a higher percentage in taxes
• TSU donated 4x more money than the president to charities last year
• TSU donated on behalf of our students to their charities last year.
• TSU has also created wealth for the economy by teaching our students how to be more productive and profitable – they then turn around and either spend money in the economy, or invest in further business which provides more money for the economy.

I could go on but why?  You get the point.  And TradeSmart is just one of the thousands, dare I say millions of businesses that do provide jobs for the country.  Yet small businesses like TradeSmart stand to be hurt the worst from this so called “Buffett Rule”.

How?  Because right now, at a time when the country needs more economic growth, TradeSmart is trying to grow.  Suddenly, however, we have to come up with enough cash to pay 3-4 people a full year’s salary – RIGHT NOW. (again this is on top of all the taxes we have paid throughout the year). How do you think this effects our ability to grow?  It stops it.  Dead in it’s tracks.  THANK YOU GOVERNMENT.

So what is my point, other than we have too big of a government?  It’s simple:

• EVERYONE should pay equal shares of taxes.  That’s what is fair.  Randomly choosing to tax those who have been the most successful is just stupid.  It’s truly stupid.  So stupid only a politician could come up with such a stupid idea.
• If the country is going to grow economically, we must encourage tax cuts.  Not tax breaks, good ol’ fashioned tax CUTS.
• The government would say “we can’t afford it” and to that I say – GET ON A BUDGET.  I will personally buy Dave Ramsey’s Financial Peace University for every member of congress and the president if they would simply follow the plan.  On top of that TSU will agree to allow every member of congress free access to our program so they can learn about something their schools obviously missed – capitalism.
• Capitalism and the Free Market is what made this country great.  The fastest and most efficient period of economic growth in U.S. history all occurred before the income tax.  If we want to be the greatest, we should return to no income tax, or at the least have a constitutional amendment with a maximum taxation amount.
• Social warfare, and socialism will fail.  Often people refer to Europe or China as a picture of how socialism should work.  That’s baloney!  Europe is on the brink of collapse from this crap and China would have already collapsed if they had not started this grand socialism with some capitalism experiment.  It was capitalism that has allowed China to grow (although there is much debate as to the sustainability of the Chinese economy because we do not know the true value of their currency)
• If someone like Warren Buffett wants to pay more to the government, by golly do it!  But don’t drag me down with you.  You can feel free to pay here: https://www.pay.gov/paygov/forms/formInstance.html?agencyFormId=23779454
• Those individuals who think taxing the rich would solve any problems, just do the basic math.  If you taxed 100% of the income from the wealthiest 1% of the country, you would:
• Only raise about $4 Trillion, not even 1/3 of the national debt
• Destroy 75% of the job creators in the country and immediately insure unemployment never before seen
• Run all of the productive people of society out of town
• Still end up holding a massive debt that you can’t pay – only now there would be no one left to create jobs and contribute
• We need to make it known to the world – if it were not for the 1%, 99% of the world would not have 99% of the goodness in life that they enjoy.  We should celebrate wealth.  Wealth is good, not evil.  And those who have it should be asked to teach others how to create more, not penalized for being productive.

So for Tax Day 2012, I have a new proposal – we’ll call it the J-Dub Rule.  It is the opposite of the Buffett Rule.  It goes like this:

• Every citizen should pay an equal amount of tax, not to exceed 9.9% of their overall income (It must be less than 10% because that’s what God gets and no government is better than God)
• Government must not spend 1 penny more than the money they receive through taxation.
• If it requires more than the government provided high school education to understand the tax code, then the code must be thrown out and re-written.
• Failure to comply with the above 3 rules results in zero taxation for the entire country until congress can comply with the 3 rules above.

That my friends is a tax code we could agree with.

Happy Tax Day!

So today I was faced with a very tough soul searching question.  A friend of mine from Maryland sent me a text message that simply read “will you still hate Peyton if he signs with the Titans?”  It cut to the heart.  The truth is I have no idea where Peyton will end up playing.  He may play for the Titans or he may go somewhere else.  But deep down I kind of hope he comes to Tennessee and plays for the Titans.

The problem:  Ever since Peyton Manning started playing for the Colts I have hated him – the reason… HE ALWAYS BEATS US!  That’s my pure hatred.  I just hate him because he’s so dang good.

This started my mind a spinning.  Isn’t that kind of how it always is in life?  When we’re younger we want to be super stars just so we can be famous.  Then when we get really good people hate us.  It doesn’t really matter if it’s football, business, or anything else.  Greatness attracts those who admire it, and those who hate it.

The real question is why are these people so good? When I say “these people” I’m simply referring to anyone who leads their field.  Be it Peyton Manning,  Steve Jobs, Andrew Carnegie, or even our very founding fathers.

As I thought about Peyton today I realized he’s not unlike anybody else.  People often worship greatness as though they are God-like.  But in reality even the greatest among us put their pants on one leg at a time.  They have fights with their spouses.  They get discouraged from time to time.  They suffer from failure more than they want.

What makes Peyton so good is not his athleticism.  Don’t get me wrong, he’s good.  But there are many faster, stronger, more agile quarterbacks.  So why is Peyton destined to be in the Hall of Fame?

It’s simple.  When Peyton Manning decided he wanted to be the best quarterback to play the game he knew he could never win with his body.  Instead, he had to win with his mind.  Peyton’s success on the field has very little to do with that game.  His success comes from the 6 days preparing for the game.  The time when he works not on the game itself, but on his mind and mental excellence.

Peyton has said he “hates to lose more than he loves to win”.  That statement stirs emotion and energy that drives him to be better.  He has learned how to channel his negative energy into positive outcomes.  Peyton is possibly the best quarterback to play the game, because Peyton has chosen to do what every other quarterback does, and then turn it up times 10. He has the mind set of success.  He has the mental focus of a winner.  And he’s a winner.  That’s why we hate him.

But do I really hate him?  The answer is no.  I actually admire him so much that the true source of my hatred is pure envy.  I WANT HIM.  I want him to be our quarterback, not our competitor’s.  And that envy drives my true hatred.

The same can be applied to Capitalism.  Today our system of economics is under attack by anti-capitalists who hate the people at the top.  They come up with all sorts of stories about why they cheated their way up there.  Or worst, why they should give all their money to everyone else.  ”They’ve been blessed, they don’t need the money”.

However the truth is, these anti-capitalists are really just envious.  They don’t hate “The Donald” because he’s such a jerk, they hate him because he’s RICH.  And it’s really not the money they hate, their hatred, just like my hatred of Peyton, is driven by Envy.

So how does this apply to trading?

Well, to be great at anything, whether it be football, business, medicine, or trading, you must learn to think like a winner.  Peyton does for a little while every week things that most quarterbacks in the NFL would never do.  And the results pay off.  Because of that little investment into his own greatness, he can claim that he is one of, if not the best quarterbacks to play the game.  That’s something most people can’t do.

For a little while, do what most people won’t.  Attend your classes.  Work hard to memorize your patterns.  Apply the knowledge.  Get good at trading and analyzing your trades.  Apply yourself for a little while, and you will be able to trade like more people won’t.  Only because you did what they wouldn’t do.  This will make you great.

But be careful, someone is lurking who wishes to hate you.  However don’t take it personal, take it as a compliment.  They really just want to be you.  But they can’t, you got their first!

This video he shot to honor the Chinese for the Chinese New Year might just offer some insight.

So what can we learn?
1) First of all Warren wears sweats! So all of you who thought you had to dress up to be successful, turns out you don’t need to do so.
2) Next, The oracle collects (and apparently plays with) Electric trains! I’m empathetic as my own father is a lover of electric trains. We have one around the christmas tree every year. So again we can see the oracle is not that different than the rest of the nation.
3) Turns out The oracle thinks the future of capitalism is CHINA! – IMPORTANT LESSON – WASHINGTON, PAY ATTENTION!
4) Most importantly, we can tell that Warren is realizing that what got him here, will not be taking us forward for the next 50 years

Now why would I say that and what importance does that have? It’s super important! The Oracle is realizing that the last 80 years, the years that made him, is not going to be the thing that works for the future. So we need a better way. For warren, I suppose that looks like playing ukulele for the Chinese to celebrate New Years. For you? Well hopefully by now you’re realizing that while Fundamental value vesting may have brought you this far, Technical Analysis is the only way to clearly navigate volatile and bearish markets.

And finally… what’d we learn from The Oracle….

Turns out he’s dang funny!

Happy Trading everyone

This post is pretty simple because each of you are going to be doing all the hard work (don’t worry, I’ve done my own hard work in this area).

The goal in this step is to make a list and put on paper EVERYTHING we want.  Everything we wish to accomplish, do, see, obtain… everything. 

Unfortunately if we tried to make a list of everything we would be overwhelmed.  So I have a way to break it down into smaller chunks, something a little more obtainable.  I like to break it into 3, you can choose to alter this if you wish.  Here are my 3 chunks that I like to work with:

1. Health
2. Family
3. Business

Now everything else should fit into one of the above categories.  If you need to add a category feel free to do so, but try to keep as few categories as possible. Here’s how I define each category:

Health: Another way of referring to this category is the “it’s all about me” category.  I call it health because everything we do for ourselves contributes to our well being.  Here are the categories I work with under health:

• Spiritual Health & Well being
• Physical Health & Well being
• Mental/emotional Health & Well being

So to get clear on 2012 I figure we must first take stock of what is truly important, just in case it’s our last year on the planet.

In my opinion the first thing to do is to make sure you have made peace with your creator.  Now I realize some people have made peace that there is no creator.  If that is your position then I suppose the peace has been made and you’ll find out on the other side if you’re right.

However statistically speaking most humans agree that there is a higher power that has somehow created, or at the very least put into motion everything that is around us.  If you are one of those people, then I feel the most important thing to make sure of at the beginning of 2012 is that you are at peace with this issue.  If you are, then by all means, clean up the rest of your life.  If you’re not – by all means get clear on this issue first.  It will make the rest of your life much easier.

The next most important thing in my opinion is family and close friends. Have you told everyone you need to tell all of the things you need to tell them?  Have you shared your legacy to the best of your ability?  Are you proud of what you are leaving them?  If the answer is yes, then you can check this off your list.  If the answer is no… well I personally think it’s more important than accomplishing all the other cool stuff you’re wanting to accomplish in 2012.

Once you know you are clear with your maker and once you know you are clear with your family and the people who mean the most to you… well I don’t guess there’s much else left.  It’s time to focus on you!

In the next post we’re going to start talking about building your legacy and moving into what I consider your created purpose.  But before we go there I’d like to suggest you take a few minutes to consider the truly most important things in your life, starting with your spirituality and then your family.  If you feel you are clear on those two issues, then you’re ready for the next one.  If not, I’d really encourage you to get clear on these two things.

A lot of people wonder through life miserable and unhappy and never can figure out why.  Turns out so much of their unhappiness comes down to simply getting clear on the things that are truly most important.  If we try to make our achievements or our personal successes the most important thing, we will always be unhappy.  True, if everything is good but we feel miserable about ourselves, we will still be unhappy.  But I have met far too many super successful people who are still unhappy.  And they are feeling that way because the things that were truly more important simply were ignored.

Before we start 2012 let’s make sure the things that are truly important are take care of.  Then we can focus on the other stuff.

If you’re extremely unclear on some of your bigger picture purposes here on this earth I do believe there is no time like the beginning of 2012 to get clear.  I’d like to recommend the Rick Warren book Purpose Driven Life as a starting point.

Until next time….

While the week of Christmas is possibly my favorite week of the year, my least favorite week may be the week after Christmas.  “Why?”  you may ask.  Because it’s during this week that so many of us realize another year has disappeared and there was so much stuff WE DID NOT DO!  ARGH!    I GET UPSET JUST THINKING ABOUT IT!!!

Now this year is similar to years gone by… except we have a major problem.  It’s 2012!  And the end of the world is coming!  The Mayans predicted it. Nostradamus predicted it.  Some scientist we never heard of from New Mexico predicted it.   Glenn Beck predicted it… actually I think he said this is the end of the world and we’re all getting our own planets… I’m not sure on that one…

The important thing is the world is coming to an end and if we don’t build a space ship and prepare we’re GOING TO ALL DIE!  NOOOOO!!!

So is it really the end of the world?  I don’t know and I frankly don’t care.  But it got me thinking.  WHAT IF?  What if it were  the end of the world?  What if we knew beyond any doubt that December 21, 2012 would be our last day on the planet?  How would that affect our goal setting for 2012?

Then I thought a bit more, “if people knew for sure 2012 was the end of the world, would they try harder to achieve their goals?  You know, just so they aliens who come to clean up the mess would see how successful they were?” And that led me to wonder why more people don’t accomplish their New Years goal.  After all, this is a new year and we can do anything we want.  Why do we keep doing the same stuff and not finishing what we set out to accomplish?

The truth is, few people ever accomplish anything… much less everything on their New-Years lists.  I use to be one of those people before I became super focused on accomplishing a bunch of stuff.  But in the old days I was just like the average bear (to quote Yogi).  Then I found the problem.  I was not accomplishing stuff because I didn’t have a strong enough reason driving me to accomplish.  So now when I want to accomplish something I know I have to tie it to what I call a Strong Motivating Factor.  The reason can be anything. It just has to be so strong that the pain of not accomplishing that goal is stronger than the difficulty encountered while accomplishing it.  Once you find that motivating factor, it’s a piece of cake to go accomplish all your goals.

Here’s an example: Let’s say two people join the herd and decide this year they are going to lose 35 lbs.  I say to the first person “why?”.   The person replies “because I’m tired of being fat and if I lose 35 lbs I won’t be fat and I will also be healthier”.

Now to some people that might seem like a good reason.  But let’s be honest, January is coming and it’s about to get COLD!  When it’s 10 degrees below freezing and you are faced with a choice of getting out of bed and going to the gym vs. sitting inside drinking a fat laced latte with lots of whip cream, is the idea that you “should be healthier” really going to help you go to the gym?  NO!  I know it won’t work because it’s never worked for me and statistically it doesn’t work for most people!

Now try this on.  I ask the other person “why do you want to lose 35 lbs”.  The answer comes back:  “well I’m aging and my bones are getting weak and over christmas I was trying to play with my grandkids and I just couldn’t because my energy is drained and I just felt fat.  I went to see my doctor and he told me I have the early stages of diabetes and if I don’t do something drastic in 3 years, energy will not be my problem, the idea of just getting on the floor to play with my grandkids will be impossible.  He also told me if I really let it go I’ll lose my ability to walk completely and could even lose a leg”.

So I ask this person: “ you mean a little exercise, losing 35 lbs and eating healthy is the difference in playing with your grandkids for many years vs. not being able to walk!?”  She replies: “yes”.

Ladies and gentlemen, is this a compelling motivating factor to get you out of bed on a cold January morning to go down to the gym, work out, drink a healthy smoothie, and continue with a healthy schedule throughout the day, day after day, until you have transformed your body?  For most of you the answer is a resounding YES.  An even better question: Between these two individuals, which one do you think stands a real chance of staying motivated long enough to lose the weight and make real life changes?

When we have a strong motivating factor it becomes very easy to do some things that previously seemed very difficult.  Without a strong motivating factor however we spend our time making excuses and procrastinating. Then after a few months the excuse transforms into “it’s just too hard” or “I don’t know what to do” or “I just don’t feel like it”.  Before you know it, Thanksgiving rolls around, then Christmas, (or hanukkah), then just like you made your goals yesterday, it’s suddenly a year later and it’s time yet again to say “this next year will be different!”

Well this year WILL be different, because this year you don’t get a full 365 days.  You only have 355 days to accomplish everything before the world ends and we all die and get our own planets…. (or something like that).  KNOWING that the end of the world is coming, how much more motivation do we need to get off our lazy bum and do something that will make us super productive, lean mean, motivated accomplishing machines?

It’s the end of the world, you have 355 days and counting.  What are you going to accomplish?  More time with kids?  Grandkids?  Significant others?  Make peace with some people?  Make peace with God?  Lose 35 lbs?  Is it time to travel some places you’ve never been? Time to actually get those finances figured out?

Now let’s change the story just a little bit… it’s 2012 and just imagine for a moment that it is the end of the world, but not for everyone… just for you!  What you accomplish in 2012 IS YOUR LEGACY!  And by legacy I mean your ENTIRE LEGACY.  What happened before 2012 doesn’t matter, and after 2012 it will not matter.  Everything starts over right here right now.  You have exactly 1 year to build and create and leave your legacy…. Do you care?

I know it’s kind of a grim question I have asked.  And I’ve rambled long enough which is why I’m going to end this blog post.  But tomorrow I will be back.  And the next day.  And the next.  And I’m going to lead you down a road of making some plans that, if you follow, will help you make sure 2012 IS the legacy year for you.  Then if you are lucky enough to see 2013 you can look back and spend all of 2013 being proud of 2012.  And if you don’t see 2013, well at least you went out with a bang for 2012!

Here’s what’s coming tomorrow and the rest of this week:

• Taking stock of what is most important
• What ALL do you want?
• What is your one dying wish?
• The ultimate formula for your success
• Who are you really talking to?
• Act, Measure, Adjust (and I don’t mean your underwear)

Until tomorrow, Happy napping while you let your food digest!

I have often times taken these two subjects as a given, a must!…thus my latest blog post covering this topic.  Furthermore, since these two subjects are directly associated with Money Management, I will touch on this topic as well.  Quite the task I have ahead of myself!  As a matter of fact, due to enormity of the task ahead, this blog will be broken down into a series of different posts and exactly how many parts in the series are up to you.  (Thanks for the suggestion Josh! )

Win/Loss Ratio what is it and how does it differ from the Reward/Risk Ratio?  Let us begin with the Reward/Risk Ratio.  Now, prior to setting up any trades (live or virtual) this component is a vital step to any Swing Trade.

In its simplest form, ((entry-target) = Reward) / ((Entry-Stop) = Risk)….and exactly how is it determined?!

You can find this topic pretty much discussed anywhere and as frequently as it is discussed it is interesting how often we neglect it.  Here I will attempt to walk you through how money management rules apply to our TSU students, and really expand on the teachings within Level One of the Foundations of Stocks and Options and touch on what was so eloquently taught in our Mastery Class: Never Go Broke.

http://www.tradesmartu.com/blog/wp-content/uploads/2011/12/LOG-11X8.5.pdf

Generally, I often times see students setup their trades, get really excited about the possibility for profits, and throw money management aside.  Here I challenge you to put money management to the top of your list even before considering your trade setup.  The image to the left is a journal sheet I introduced into my trading journal sometime back, it really helps me to stay on track with my money management rules.  It essentially acted like a bit of a checklist for me.  You can either use this or try something else out if you wish; however, the important thing is to put up a stop sign and acknowledge the essential rule of money management.

Notice, the first item in the log requires you to predefine your risk by identifying what percentage of your entire portfolio you should allocate to any given trade.  It is easy to say, it is 5% of your portfolio, but the truth is that our student’s are starting off with smaller account sizes, often times around $5,000.  So let’s do the math, 5% of $5,000 would be $250.00.  Keep in mind that this ultimately is up to you, but we suggest keeping your investment below 10% for smaller account sizes.  Plus, as your account increases in size you can then decrease this percentage.  Now, for the purpose of this blog post I will continue to use our 5K example.  By rethinking this, with a 5K account, using up to 10% on any given trade will allow us to allocate $500.00 to one trade.

Phew!  Finally we can consider all other avenues of Money Management; when we review the example of my log you will notice we have come to the actual trade information.  Being that this log is really specific to Trending Trades this is how we will continue to proceed.

Let’s now take a look at CSX

CSX is trading in a symmetrical triangle (lessons 9 and10 of Level Two)  

I have determined due to the heightened bearish sentiment in the market, I will place my entry on the Bearish side of this Triangle Pattern.

Below you will find my log entries:

Account Value = $5,000

Predefine Risk: $5,000 X 10% = $500.00 (max trade allocation)

CSX current price at $20.43

Entry at below $19.90

Down Target 1 $18.90

Since I am trading options, I will now acknowledge the price I am paying for my option contract.  We are in December, naturally, I will be purchasing January options.

I am entering based on a contingency order: Buy a 20.83 January Strike Price.  The cost of this will be about $1.63/share.

$1.63 X 100 Shares = $163.00/contract

Seeing as my max trade allocation is $500, this means I can buy up to 3 contracts = $489.00

Entry Date: TBD

Stop Placement: $20.40 (also based on a contingency order)

R/R: 1/.5

Let’s now expand on my stop placement.  By determining where I plan to place my stop at trade entry, I am thus accepting my entire base account size risk.  (Mark Douglas‘ ears may be ringing)  This is vital.  Huh?  Let me expand on this: If I am willing to risk .50 for every share, my maximum risk will then equate to $50/contract.  That would be $150 max risk.

Now how does this impact the bottom line exactly?  Well, if we divide our max risk by our overall account size, the result will be our overall max negative impact on our account.  In this case, it would be 3%.  A commonly thrown around rule is the 2% rule of capital preservation; that is, you should not risk more than 2% of your overall account size.  In this case I will make an exception and say we are okay at 3% since we are falling within our other rules of money management.

Exit Date: TBD

If my trade gets triggered and all goes according to plan, this will make for approximately $300 profit, which is a 61% ROI!  Sweet!

You are likely asking how this was calculated…well, you can either use a trade calculator which most brokers have or you can estimate this by doing the following:

(Entry = 19.90) – (Target 1 = 18.90) = $1.00 X 300 (Shares, there are 100 shares in each contract) = $300.00

There are several other variables that go into this summation which are discussed in Level One: Classes 4 and 5, Foundations of Stocks and Options.

Position Sizing  Depending on how many contracts are purchased, as the stock moves in the direction of a trade, you should always consider closing out a contract at each target point.  This is just sound money management; you are taking profits off the table and paying yourself.  In the case only a single contract is purchased, once a target is reached, if volume is high and there is much sentiment behind the move, you can tighten your stop and pray the trade does not retrace. (I hope you are laughing right now) Honestly, in this case, please refrain from letting the sentiment of greed infiltrate your seemingly perfect plan.  Stick to your plan: trade to your target and exit.  After all, there are always other trades you can enter…the market is never void of opportunity.

Now on to Win/Loss Ratios and how they apply to all of this trade setup talk.  We discuss win/loss in our Trading Conditioning System and this is your indication of whether you are really ready to enter the market.  Are you seeing success in your virtual trades?  Check out your Win/Loss Ratio!  I know, easier said than done as the market is just so tempting!!

You will determine your win/loss ratio by doing the following:

It is the number of trades entered and exited (A) – the number of losing trades (B) = Profitable Trades (C)

Profitable Trades (C) / Number of Trades Entered (A) = Win/Loss Ratio

For example, you place ten trades in one month and 7 out of the 10 were profitable.  This equates to a 70% Win/Loss Percentage.  Am I ready to go live, nope not yet, still have a bit of refinining to do.  *REMEMBER, IF YOU’RE NOT SEEING SUCCESS IN YOUR VIRTUAL ACCOUNT, IT IS NOT GOING TO HAPPEN IN YOUR REAL ACCOUNT.*  I don’t mean to be harsh, or maybe I do; I just want to give you, the reader/trader, the plain/brutal truth.

Once you are working in your virtual account you really want to see this percentage increase to about 75%-80%, this will be your indication that you are ready to move into some live trading.

Keep in mind we want to promote awesome trading habits; this is one of your first and vital steps to making it happen.  Plus, awesome trading habits lead to awesome trading results!

Happy Trading!

Up next: Reward/Risk in relation to Credit Spreads…

A few weeks ago, we asked all TSU students to upload a video to Facebook and to tell their story about how TradeSmart University had impacted their life this year. I had no idea what we were in store for!  The depth of gratitude that was recorded and submitted was both honoring and humbling.  Thus, my mental wheels began turning as I started considering this mindset of thankfulness.

Our top 10 favorite videos are re-posted on our TradeSmart YouTube page.

In my last blog post, I talked about The Mindset of Success and the importance of asking the right question.  Now, by addressing the issue of personal psychology, we are able to effectively determine with uncanny accuracy the long-term success of a beginning trader.  While it’s true that an unhealthy mindset will nearly guarantee poor results, a positive mindset may not be a guarantee of success.  It is indeed possible to have a positive mindset and a nasty disposition–picture the stereotype of a ruthless leader, and you’ll have the right idea.  However, after teaching literally thousands of students to trade, I’ve noticed a very consistent and obvious trend with almost all traders.  It’s simple, and when it is explained in five-year-old terms, it translates to this: unpleasant people lose and nice people win.  It’s true!  Without fail I can tell you I’ve never seen a contentious spirit experience success, and conversely the majority of benevolent individuals are rewarded nicely both in their trades and also in their personal lives.

I understand you may be in a circumstance where you take personal issue with this idea; as maybe you’re in a position where you or somebody you know lost their job because of some dishonorable activity from a co-worker (that once happened to me!); maybe you lost a contract because a competitor made false claims; or maybe you were sued on completely unjust assertions and were forced to settle for millions.  The temptation is there to sell our soul and believe the story that nice guys finish last . . . I completely understand.  However, in my experience, the stock market has a way of being the great equalizer and has its way of removing bullies from trading.

Successful traders must show up each day knowing their success hinges on how they control their mindset (psychology) and state of mind (attitude).  Perhaps this example will make this concept more tangible.  (Out of fear of wearing out their welcome, can I use my children again for this example?  They make for such great object lessons!)  Last weekend my wife and I were out with all four kids.  Yes, four kids.  Logistically, I will tell you it’s probably as complicated as you’re imagining right now . . . maybe more.  Two in diapers, one still breast feeding . . . it’s always an adventure!  Soon, this particular outing was getting on towards lunch time and the usual chants for food began to emerge from the back seats of the car.  Normally, I avoid restaurants like the plague, more out of respect for servers nationwide than anything; as when our crew moves in, it’s a force to be reckoned with!  However, this time I made an exception, and the chants changed to applause.  The kids love to eat out with Daddy, Daddy loves to surprise and delight, and the server loves to receive a big tip!  It’s a win-win for all!

We pulled into a little restaurant here in Nashville called City Limits.  Salads, soup, sandwiches . . . there was something for everybody, yet my oldest son began a subtle protest, lobbying instead for another restaurant choice (ironically, with nearly the same menu!).  However, not wanting to pack the crew back in the car and drive down the road, his request was denied.  Slowly, quiet protest turned to flamboyant complaining; which prompted father and son to head back out to the car for a little “teachable moment.”  I quieted him down and explained how it disappointed me to see him so upset, when I knew his ultimate goal was to enjoy the restaurant experience with the family . . . regardless of the menu.  I also explained if he wanted to repeat the restaurant experience, his behavior needed to change to a more gracious tone so that I would feel compelled to return.  In other words, by continuing to complain about something silly, which was out of his control, he was actually ensuring the very outcome he was trying to avoid.

In contrast, my three younger children were little angels this particular day.  They were thankful and appreciative of the time together and for the food we enjoyed.  In fact, it was so evident, the neighboring tables stopped and commented on their behavior! (Yeah, I’m proud!)  It was then that the object lesson hit me.  Their young mindset of gratitude had in a moment solidified their future success!  I left looking forward to repeating the experience soon, as it was a tangible example of what I’ve witnessed so many times in the metaphysical, especially as it relates to trading.

Now, let’s pull this back to the realm of trading. You likely know already that TradeSmart and other companies sponsor scholarships for our students to attend the entire Level 1 module in the Foundations of Stocks and Options series.  Without exaggeration, our competitors charge thousands of dollars for this same content, which through the generosity of the scholarship, we provide without cost to the student.  The vast majority of students are grateful for the opportunity, but usually about 1 out of 1,000 ends up complaining about anything (and usually everything).  I had one of those snarky emails passed on to me yesterday, and it was really heartbreaking.  I know that beyond being obviously unhappy personally, this person stands little to no chance of achieving his/her goal.  Like my oldest son, this person’s state of mind is ensuring the very thing he/she fears most: failure.

Therefore, as a trader, you must manage your state of mind just like you manage your trading plan.  In fact, I know a highly successful trader who makes state of mind part of her trading plan.  She literally will not trade if she’s in a bad state.  Brainstorm with me about a few ways you can change your state of mind in an instant.  I’ll give you a hint: if you need to change something above your shoulders, it probably begins with something below them!  Changing your state of mind usually involves a physiological change.  Consider some of the following:

• Sit up in your chair like you are about to jump up as high as you can.
• Put on some music and dance like a fool!  (We call them dance parties.)
• Get out of the house and go volunteer somewhere — help people who are less fortunate.
• Go work out.
• Meditate / Pray.

What ideas did you come up with? Jot them down on a note beside you.  That’s  right: write it down (you might find writing even changes your state!) . . . but more importantly, get out and do it!