Van’s note: Van Bryan here, Jeff Brown’s longtime managing editor.
At The Bleeding Edge, our beat is the world of high tech… But every once in a while, we like to feature profitable insights from from our Rolodex of investing experts. Today’s guest essay comes courtesy of Jeff Clark.
Jeff is often referred to as a “master trader.” And he’s earned that moniker. Jeff’s readers enjoy a 79% win rate and a 36% average profit. In all my years working in financial research, I have never seen anybody with a better instinct for short-term market moves.
Today, Jeff reveals an important rule that’s helped him be so consistently successful. If you’re a trader or if you’re interested in becoming one, I strongly encourage you to see what Jeff has to say. Read on…
By Jeff Clark, Editor, Delta Report
A few months ago, my readers made a lot of money with a bullish trade on Dropbox (DBX).
Since you’re a reader of Jeff Brown’s work, you’re likely familiar with the cloud-based file storage company.
In early June, I recommended my readers buy call options on Dropbox – which would quickly rise in value if the stock climbed.
Later that month, the trade was going well. We were up 100% in just a few weeks. So I recommended that my readers sell half their position. It became a risk-free trade.
But here’s the thing… Dropbox kept climbing.
When we finally closed the rest of the trade in early July, the call options had climbed 164%.
And then the emails started coming in…
“Why did we sell half early?” “Why didn’t we hold on?” “We could have made even more money.”
I get these types of questions from readers all the time. Here’s what I always tell them…
Imagine you’re a contestant on the game show Let’s Make a Deal.
Monty Hall pulls you out of the audience. He waves $2,000 in your face and says, “This is your money. You can take it and keep it right now, or you can trade it for what’s behind the curtain.”
Of course, you know from a lifetime of watching daytime television that there’s a 50% chance that what’s behind the curtain is an all-expenses-paid trip to Mazatlán – valued at $5,000 – and a 50% chance that it’s something virtually worthless, like a farm animal.
What do you do?
If it’s me… I’m taking the cash.
I’m thinking, “I came here with nothing. There’s a 100% chance I’ll leave here better off if I take the money. There’s only a 50% chance I’ll leave here happy if I take what’s behind the curtain. Either way… my life isn’t going to change dramatically. So I’ll take the $2,000 and be happy no matter what.”
Here’s another line of thought…
“I came here with nothing. The worst case is I’ll leave here with nothing. But there’s a 50% chance to increase the return on my prize by 150%. The odds justify that trade. So I’ll pick what’s behind the curtain.”
Here’s the thing… There’s nothing wrong with either decision. All that matters is how you view the consequences of the trade. Let me explain…
I’m going to be happy if I get a $2,000 windfall profit. I might be slightly more ecstatic if I win a trip valued at $5,000. But I’ll feel like an idiot if I give up the $2,000 and go home with a goat.
So I’ll pass on “ecstatic.” I’ll take “happy.”
Not everyone thinks that way – which is why we love watching game shows.
Let’s apply this thought process to the stock market…
Every time I close a trade, in the back of my mind, a little voice asks, “What happens if it moves even higher?”
This is the equivalent of Monty Hall asking if I want to keep the $2,000 or trade it for what’s behind the curtain.
I know for sure that I’m happy if I close the trade right now. I don’t know if I’ll be happier or feel like an idiot later.
So I almost always chose to err on the side of happiness.
Now… if this is your only time on a game show… if it’s your only chance to make a trade in front of Monty Hall, it’s understandable if you choose what’s behind the curtain.
After all, it’s your only shot to maximize your gains.
I get it.
But the stock market isn’t a game show. We have trading opportunities almost every single day. The secret to longevity as a trader is to consistently take the money when it’s flashed in front of you. And that’s exactly what we did with Dropbox.
You might feel a tinge of disappointment if a trip to Mazatlán is behind the curtain. But you’re still heading home with more money than you had before.
Be happy. At least you’re not going home with a goat.
Best regards and good trading,
P.S. Sound trading discipline like this is just one key reason I was able to make a career out of trading… and retire 25 years early.
The other reason, of course, is knowing how to spot highly profitable options trade setups before anyone else.
But options trading can be complicated. And while it’s certainly rewarding, it’s not for everyone.
That’s why, for the first time in my career, I’m unveiling a trading strategy that provides options-like gains… just from trading stocks.
I’ve been testing the strategy for the past 18 months. And I can say with near certainty that I’ve cracked the code.
Plus, just for signing up, you’ll have free access to a live training session at 8:30 a.m. sharp on Monday, October 21. There, I’ll share my favorite trade setups for the week ahead and reveal a few details on my stock-trading strategy before the big event.
I hope to see you then.