Guy Cohen Interview: A 4-Point Trading Plan For Finding Stocks
by Karim Rahemtulla, Investment Director, Smart Profits Report
Tuesday, April 7, 2009: Issue #973
Our colleague, Karim Rahemtulla, has been interviewing Guy Cohen, one of the masters of stock and options trading. He’s the author of Options Made Easy (now in its second edition) and The Bible of Options Strategies – both of which are on the bestseller list. With the interest in options and trading strategies in the markets right now, we encourage you to read Guy’s insights below…
So what exactly do you look for when trading stocks? And how do you go about finding the right stocks to trade in the first place?
Talk about $64,000 questions. But Guy Cohen is one of the most qualified experts to answer them.
In last Friday’s column in the Smart Profits Report, we brought you the first part of my interview with Guy – a man who dedicates much of his life to educating investors about how to trade stocks and options. So far, he’s introduced more than 100,000 to his user-friendly concepts. And his hugely successful trading strategies are proof that his methodology works.
So let’s get his take on these two crucial questions, including a simple, effective four-step trading plan – and why not having it sets you up to fail from the start. Essential advice for investors, novice and expert alike.
An Interview With Investing Expert, Guy Cohen
Karim
So Guy… with so many stocks and options strategies out there, I’m intrigued as to how you start the process of executing a trade. How do you find the best ones to trade?
Guy
Well, the quick answer is that I look for consolidation patterns. I then trade the breakouts. The exact “how” and “why” are much longer answers, but they begin with the real key to trading: Finding a method that suits your psychology and mindset.
The most important question is: Do you have a trading plan? The clear answer should be an emphatic “yes,” but you’d be surprised how many investors don’t have one. They just trade on a whim, failing to plan their entry points, exit points, or stop-loss areas. They might as well be gamblers. But what’s also surprising is that most teachers don’t even teach a trading plan.
Karim
Can you give us some insights into how you do it?
Guy
Well first, I only trade breakouts from neat consolidation patterns, preferably ones already showing a trend.
Karim
Are you trading the options or the underlying stock?
Guy
Both. Once I find a decent consolidation pattern, my trading plan basically consists of…
- My entry point.
- Exit point – the first profit target.
- Stop-loss level.
- Managing any excess profits.
It’s very simple, but very effective. It’s also very psychological in that my trading plan quickly rewards me for a good trade, but also keeps me in the game for a windfall profit. The other major benefit is that I only enter on breakouts, so if the stock doesn’t break out, I can’t lose.
Karim
So the trading plan has to include your entry points, stops and profit targets?
Guy
Absolutely. But most traders don’t have even that. And that dooms them to failure before they even start.
Karim
And you reward yourself for making a good trade, yet also retain a position, just in case the stock continues to move in your favor?
Guy
Exactly. And remember, the beauty is that if there’s no breakout, I can’t make a loss.
Karim
Just goes to show that you don’t need to have a complex trading plan. This one is very simple, yet still very effective. And getting those windfall profits must really improve the batting average.
Guy
Right. And when those windfall profits come around – like in the last two weeks of February and first week of March – I have students who more than doubled their money in that time alone.
Karim
And just to be clear, you literally trade just one method all the time?
Guy
Well, it’s more like I trade one pattern all the time. This means I’m completely focused on making money. Every great trader I know focuses their energy on only one or two practices. I like my method because it combines low risk with high potential rewards. It’s also very easy on my mind.
Karim
So what advice would you give to a beginning trader?
Guy
Focus on simplicity, and the clarity of the method you’re learning. Trading isn’t complicated, so there’s no need to make it that way. Don’t go for forecasting systems or black boxes. Go for simple patterns, where you can easily formulate a trading plan that restricts your losses and enables you to play for windfall profits.
And because psychology is so critical to successful trading, having a proper trading plan that is simple and effective will help you manage your psychology.
Karim
As one of the acknowledged leaders in stock market education in the industry, what do you see as the most common mistakes that people make?
Guy
The most damaging is that many traders have no structure or trading plan. This is a product of either desperation or a gambling mentality, and that then leads to impatience and indiscipline.
Karim
And your trading plan insures against these elementary errors?
Guy
Absolutely, because with my method you know from the outset what you have to do and where you have to do it. That degree of certainty keeps you on the straight and narrow, regardless of whether an individual trade makes money or not.
Karim
Alright, so what’s your best winning run with this plan?
Guy
My best performance so far was when I made 1,400% in five to six months. But I plan to beat that in the next couple of years as my systems improve. Once I see that neat pattern, it must be easily “manageable.” In other words, I know in advance where to enter, where my initial stop is and how to manage my profits.
I’m always refining my strategy and we’ve made some important improvements recently, which have tested very positively. All I need now is the time to trade them!
Karim
So what is the key behind the system that will allow you to top that?
Guy
Well, first I only consider neat-looking “flag” (consolidation patterns). The patterns must fulfill several criteria to even be considered for a trade.
Karim
So what’s the real secret to this, though? Where’s the magic? How are you able to actually execute this way of trading with such success?
Guy
The magic is being able to find the patterns. That’s what saves the time and makes everything possible. A system that only takes small profits is akin to swimming upstream. That’s why it’s pointless only trading retracements. The other part of the equation is in executing the plan correctly every time.
Karim
So have a defined investing plan, stick with it and don’t mistake investing for gambling.
Okay, that wraps things up for this week. Until next time.
Good investing
Karim Rahemtulla
P.S. Read Part 1 of my interview with Guy Cohen. And if you want to catch the next installment, stay tuned at The Smart Profits Report.
Karim Rahemtulla is the Investment Director of the Smart Profits Report and Mt. Vernon Research. He is one of the country’s foremost specialists in options trading.
- LEAPS: How to Add This Option Trading Strategy to Your Investment Arsenal
- Trading Options: The Power of Leverage, Call Options & LEAPS
- LEAPS vs. Stocks: An Investment Vehicle Throwdown
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