“Every trader is going to lose money sometimes – if he or she trades more than just a few times -the secret is to learn how to lose small amounts and make larger amounts. This simple secret, though not easy, must be learned for success.” – Steve Wymore – “Internet Trading Academy”
DON’T ALLOW THE LARGE LOSSES!
One large loss can wipe out the gains from many good profitable trades! So, do not allow large losses. This is even more important than a high win rate. How many times I have got into a position that I should not have even got into. In that situation, after I got in I realized that the trade was going against me. I could have closed the position, but, as often, I did not want to take the loss. And as the loss slowly got bigger and bigger, I thought, “surely it is going to come back,” but it usually didn’t. The loss just got larger and larger. If I would have just got out early or set the stop loss I could have saved a lot of money and irritation. So, how do you avoid this situation? This is how: As soon as you see the trade doing something that you didn’t expect it to do, get out. You can always get back in if it starts going the way you want. The problem that we must overcome is believing that maybe we can end up being right. Being right is nice, but keeping your money in day trading is better. So what, I was wrong! I’m wrong a lot. Being wrong losing a little feels a lot better than being wrong losing a lot. Now, let’s make money by getting out of those wrong way trades early. It’s hard to tell you exactly where you should get out because there are so many variables, but in general, if it has gone two ticks the wrong way, much of the time that is a sign to get out, unless you have a very good reason to believe it is going to turn back to your direction. And don’t guess where the bottom will be when a stock is falling. Most of the time you will be wrong and lose a lot of money. It is better to wait an obvious turn-a-round and miss a little movement at the beginning of the reversal.
EXAMPLE OF A BAD TRADE
Below here is an example of a bad trade that I don’t really want to show because I made it. But we all make mistakes, just do your best and you will likely get good if you keep at it.
In the below example, I entered a buy order after a big move down, thinking that it would make a correction to the upside, but did it? No. So, I should have gotten out after a couple of ticks the wrong way. But did I do the smart thing? No. I missed the move down and should not have entered against the trend. Mistake? Yep. And didn’t even have a stop loss set. I know, can you believe it? Not good. Don’t do it. Save your money for a good trade that goes with the trend and makes money! I think it did start to move up a little at the place where I entered and that enticed me. Don’t get tricked or enticed into a bad trade. Just follow the rules and save your money!
Below here are two more examples of bad trades that I don’t really want to show because, again, as above, I made them. But again, we all make mistakes, just do your best to learn from my bad examples as well as the good ones.
Remember, don’t get tricked or enticed into a bad trade. Just follow the rules and save your money! Wait! There is a nice trade coming. Patience will make you money.
Suggestions to help you get good at getting out of a bad trade quickly.
Print and give yourself achievement rewards for getting out of bad trades quickly.
I have given this problem and solution much thought. Listen to the video below about rewarding yourself for trying and for good behavior, whether or not you get what you want. So, of course you would prefer to always make money on trades. But that is not going to happen. So, one of the big secrets to making money trading is to make more than you lose, not to never lose. But if you make five or ten winning trades and then have one or two large losses, you will often lose more than you make. So, you and I need to learn to get out of bad trades quickly! That is really important. I suggest to see if it will help you by giving yourself a little reward for doing just that. It will help to reprogram your mind from not losing, to not losing a lot. This is very important. So, I suggest that you right click the images below and select “save image as” to save it to your computer, then print them (make sure that you set your printer to “shrink to fit” to get the whole photo on the page) and keep them close by when trading so that when you get out of a bad trade, you can grab one and put it on your desk to congratulate yourself for getting out early.
And remember, make your money going with the trend. It is much easier to get in when the trend is starting, and maybe even ride the trend or get back on the trend after a pull-back, than it is to guess the exact pull-back spot and get a profit from a pull-back. It can be done sometimes, but it is much more difficult. Just wait for the “Gold Line” cross, up or down, and then get in, preferably after a pull-back, though sometimes the dynamics are such that there is no significant pull-back at the area of the cross, just a strong breakout move.
MOVE YOUR STOP SO YOU WON’T LOSE
Another important stop strategy is to immediately move your stop up to break-even or into positive territory after the trade has moved in your favor, so that if it comes back the wrong way (and it often will), you won’t end up losing money on a trade that you were winning on just a moment ago. This can save you a lot of money.
WAIT FOR A GOOD TRADE AND DON’T OVER-TRADE!
What you want to do is learn to wait for a good trade. Remember, trading in itself is not that enjoyable. What is fun is making a lot of money trading so that you don’t need to do other things to make money. With experience you will learn what a good trade looks like. Warren Buffet says that “the stock market is a device for transferring money from the impatient to the patient.” What do you think of that?
If you just want to be in a trade, use the simulator. Other than the simulator, only get into excellent trade set-ups. The more practice you have, the more you will recognize an excellent trade set-up. See my module on “Chart Examples” to see how to recognize a great set-up.
When using real money, I suggest you limit yourself to taking only five trades a day, not twenty or thirty. and really, after you get really good, you may only want to take two or three a day. Just trade until you reach your goal and then relax and take it easy, or do whatever else you have for the day. That is your reward for trading well. You are done early, free to do what you want. When you don’t need to spend all day working you can use your time for other important things.
The Mental or Psychological Aspects to Trading
These two videos below are the best videos I have found on the mental aspect in trading. The first gives a good introduction to understanding what it takes, and how long it takes, to learn how to manage risk and get out of losing trades early. He also talks about what kind of people make good traders. The second one below is much shorter (11:50), but just covers a little of how we need to make it our job to manage our performance in an always uncertain trading environment. We should not just believe that we are going to win or give our focus to winning. He goes on to say that winning is not something that we can really control, but we can learn to manage our performance.
So, in short, do a super job of managing risk so you can be a profitable trader. Yeah, that’s what we want!