Why You Should Trade Like You’re on a Diet…

My Dad had to put himself through college.

To pay his own way, he worked a number of jobs while taking classes and studying. And to save money and time, he ate the vast majority of his meals at “greasy spoon” diners.

So by the time I was born he had gained a college diploma… a solid job… and also more than a hundred pounds of extra weight.

One day, when I was in elementary school, Dad decided it was time to do something about his health.

He wanted to be around as I grew up so he designed a simple weight loss system that relied on the same discipline he used during his school years.

The first step was watching what he ate a bit more carefully. For example, I remember him removing half of the bun whenever he had a hamburger.

But the keystone of the whole plan was that, instead of eating lunch, he started taking a brisk two-mile walk every day during his break.

Sounds almost too simple, right? And yes, it flies in the convention of “smaller meals throughout the day” and all the other current thinking on weight loss.

Still, it worked! And Dad went from more than 280 pounds to back under 180.

More importantly, he has kept the majority of that weight off all the way through today – 35 years later!

Weight Loss and Wealth Building

As a lot of people like to point, weight loss simply boils down to fewer calories coming in than you’re burning off.

That’s exactly what Dad accomplished by cutting out lunch and replacing it with exercise. 

Really, all he had to do was stick with the system and some degree of success was practically inevitable!

It’s the same basic thing with wealth building.

If you spend less than you earn, you gain money over time. The longer you do it, the more you gain. The bigger the difference, the more you save. If there are investment earnings in there, things compound even faster.

Again, it’s pretty simple.

Want to take it a step further and become a trader?

Then you want to increase your number of winning trades to pack on the wealth by compounding the gains on top of each other.

And you want to cut your losers before they do much damage to your overall results.

That way your portfolio grows fatter, faster!

But how do you do this in a systematic way?

Just like dad’s diet, there are two basic steps to take:

Step 1: Institute Stop Losses on Every Trade You Make

These orders tell your brokerage to automatically sell a given investment if it drops to a predetermined level.

That way, you are out before the investment has a chance to drop any further.

You can also continually raising these stop losses along with any success you begin seeing – so that your overall downside keeps getting reduced in the process.

Please note: I am not talking about so-called “mental stop losses,” which so many people love to use.

Having predetermined prices at which you MIGHT cut losses is far different from actually entering those orders with your brokerage the minute you institute any particular position.

In fact, I would say this crucial difference is what separates successful traders from the legions of wannabes.   

It’s too easy to change your mind once a trade goes against you!

Of course, you also need…

Step 2: Determine Your Price Targets and Enter Them as Additional Sell Orders

In a more active approach, having predetermined profit targets is just as important as having defined stop losses.

Because the whole point is moving from one winner to the next as quickly as possible… unemotionally… and without looking back or second-guessing your decisions.

No matter how good of an investor you are, you’ll never get your timing right all of the time.

Nor do you need to. You simply need to have the profits from your good trades total more than the losses from your bad trades.

This is precisely what a combination of stop losses and profit targets can help you accomplish.

That way the overall results get better and better, just as my Dad’s weight dropped consistently over time.

To be clear, I don’t believe you need such a system with long-term approaches like buying and holding quality income stocks.

However, I think this type of discipline is absolutely necessary if you’re looking for bigger, faster returns in a shorter period of time by actively trading your portfolio.

To a richer life,

— Nilus Mattive
Editor, The Rich Life Roadmap