Don’t Focus on Your Profit and Losses (P&L)

by | Mar 12, 2019 | Bishop's Corner

Stocks are mixed today, as the Nasdaq and S&P 500 are trading higher. But Boeing is dragging the Dow lower.

That said, there is a ton of economic data that is going to be released over the next few days, including: CPI, Durable Goods, Jobless Claims, and New Home Sales.

I study economic data closely, along with market volatility. Furthermore, I’m playing close attention to what the Fed says and other market internals.

It allows me to get a big-picture perspective on overall market sentiment.

When it comes to my actual trading, I use options to express my opinion… and I use my “money pattern” to help me find entry and exit levels.

And when it’s clicking…

(It doesn’t matter if stocks are going up or down, my strategy works in all market conditions)

It’s really clicking…

My trading results prove that my strategies work… and because of that… I just let the numbers play out.

What does that mean?

I’ve learned not to get too worked up over the profits or losses (P&L).  

The moment you treat trades as anything more than a number, you’re getting too emotional… which can lead to making bad decisions.

A lot of time, the problem I see is traders not holding on to winners long enough.  

I suggest people always trade with a small enough size that they don’t lose sleep over it. If you’re uncomfortable with how big your trading size is, you will make bad decisions with it.

Here is the thing… If you learn my trading style, you don’t need to strap on a lot of size to make money (because options are leveraged).

Jason Bond, has been able to take his trading to the next level this year (sign up for his live presentation tonight here.)

He’s been able to do it by cutting out the junk (trades that were losing money) and focus on his strengths (trading penny stocks with catalysts).

Sure, he’s racking up incredible profits ($260K+ year-to-date) but if you ask him what he’s focused on… it’s the process first and the profits secondary.

He’s got an edge… and he’s letting the numbers work for him.

You see, once you’ve mastered a couple of good strategies… the difference between making the big bucks and being a break-even trader is your psychology.  

That said, I’ve come up with a list of best practices that you can apply to your trading immediately.

Focusing on Your P&L is Dangerous

There are two types of traders:

  • Those who trade their profit and loss (PnL) – making moves whenever they have the slight profit or loss… and sometimes getting emotional with their trades and making bad decisions.
  • Those who focus on the process.

The traders who focus on the process and take the time to learn about trading stocks and options tend to be the most successful.

But how did they get there?

They got comfortable with position sizing first, then they focus on their A+ setups… most of all, they don’t focus on their PnL.

If you’re uncomfortable with your position size and don’t have the right strategy… chances are you’ll make bad decisions with it.

Think about it like this… if you invest 25% of your capital into one options trade, you’re going to trade differently than if you invest 5%, right?

You see, when you size your positions too big in relation to your account size… you get emotional… and you end up “trading on tilt”.

What does “trading on tilt” mean?

Basically, you’re making decisions based on a number… whether you’re up or down money on a trade… that’s not the right way to approach trading.

Focusing on your PnL is a sure-fire way to potentially damage your account.

Ways to Prevent Trading on Tilt

Here are some ways you can prevent being emotional and trading your account:

  • Set a rule for yourself, like “I won’t allocate more than X% of my capital in any one trade.”
  • Have a favorable risk-reward ratio. I won’t get into a trade unless I think I can double my money. For example, I’m comfortable risking 50% to make 100%+ on a trade.
  • Only trade with an amount of capital you’re willing to lose.
  • Have an exit in mind in case things get sour.

For example, I limit my position sizes to 5% of my account size. When you’re first starting out, maybe you want to limit your position size to a number less than 5%.

If you follow a specific position sizing rule, you can actually get a feel for stocks and options… best of all, you won’t be as emotional, and you probably won’t run the risk of blowing up your account.

Additionally, you’ll be able to learn how to hold onto your winners.

When you get emotional… you end up leaving profits on the table. That’s why I stress being able to stomach the risk and properly sizing your positions… because at the end of the day, scared money don’t make money.

That said, let’s take a look at this in action.

Case Study: XPO Logistics (XPO) Options Trade

Now, I like to use charts to signal when I should get into a trade or not.

Take a look at the hourly chart on XPO Logistics (XPO).

Simple Moving Average Crossover (The Money Pattern) is Powerful

  • The 200-hourly simple moving average (SMA) – the green line in the chart above – served as an area of resistance. In other words, the stock had a tough time breaking above that area.XPO broke below the green line, and tried to break back above it three times, but failed to do so. That let me know it was time to look to start looking at a bearish trade.
  • The blue line (13-hourly SMA) looked like it was going to cross below the red line (the 30-hourly SMA). This is a bearish signal, and indicates the stock could drop in the near future.

Well, what did I do after I saw this chart pattern? I purchased put options. That means I was betting that the stock would fall.

Here’s a look at the hourly chart on XPO after I bought put options:

I had a favorable risk-reward ratio (risk 50% to make 100% – I’m comfortable with that) and best of all, I had an exit in mind. If XPO clearly broke above the green line… I would be out of my options.

Keep in mind, I sized my position properly. My options position was far less than my 5% limit per trade… and that allowed me to hold onto the winner.

Now, most traders will be stoked to take 380% in an options trade. However, that’s trading with your P&L in mind.

I know when stocks sell off, they tend to go a lot farther than you would expect. That’s what proper position sizing and not focusing on your PnL teaches you.

I wasn’t going to let this trade go against me, so I had exits in place. I also wanted to let this winner run.

Just a few minutes after… I saw a 380% winner turn into a ~427% winner.

I wasn’t focused on my P&L… so I was able to remain patient and let it ride.

That’s the power of just focusing on the process… not just trading your PnL… and using the money pattern.

That said, I will touch base with you again tomorrow, as there will be a ton of economic stuff to cover.

Furthermore, if you are tired of watching Theresa May’s Brexit vote in the UK Parliament… take a break tonight… and watch Jason Bond’s webinar at 8 PM ET. I promise you it will be a lot more valuable and entertaining. Click here to register for tonight’s event.

Bishop Recommends

“Never lose more than 2% of your entire account on any trade.”

That’s just one of the golden rules that has helped Petra Hess amass millions in trading profits.

She teaches her risk-averserules-based, and consistently-profitable strategy to new stock traders.

Join her latest webinar as she explains how to time your entries and exits.

If You Can Click and Type, Then You Have What It Takes To Become A Stock Market Millionaire – Once You Know The Secrets. 

Download the Making of a Millionaire eBook today.

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