Dealing with Losses
Most traders typically like to talk about their winners while avoiding any recollection of their losers. Smart traders will be aware of the patterns that occur with losing trades, so as not to hold losing trades any longer than necessary. Read below for tips on managing losses.
Today I'd like to address the issue of trades that don't work out as positively as you originally envisioned. If you have been an investor for any length of time, you will have experienced a loss. While experiencing a loss is less than enjoyable, the real danger of a losing trade is the threat it poses to your confidence and your mental approach.
That being said, here are some ground rules to keep in mind:
1. Understand the difference between confidence and unreasonable expectations. You should believe that every trade you place, based on your systematic criteria, is going to be a winner. If you are not confident of that, then don't place the trade. However, realize that over a given length of time, at least some of your trades will work against you. Even a great trading system fails sometimes, so your job is to make sure your system has an overall net positive return. If you are redefining your trading system for every trade in an effort to insure success, that is simply a signal that the system is ineffective.
2. Cut losses. It is critical that you be willing to take small losses before they turn into big losses. I can't tell you the number of times I've heard someone say about a stock "I'm sure it will come back.", only to see the share price continue to deteriorate. Besides doing damage to your account value, riding a loss can be a substantial blow to your confidence. If you are that confident about a stock, then sell it at a small loss and buy it back when you see it begin to turn around.
3. Don't try trade your way out of a loss. (This is an extension of rule number one.). By this I mean don't follow up a loss by placing a trade you wouldn't have normally placed in an effort to make up for the loss. The past can't be changed, so let go of it and approach the next trade in an unbiased manner.
4. Constantly learn. I'm not going to say there is something to be learned with every loss, because sometimes there is not. When there is something to learn though, then you certainly should learn it. More importantly, if what you learn is something that will improve your trading system, take it and apply it to your system. (Notice here that I said to apply it to your system, not just to your next trade.) Your system must have an overall net positive result, but there is nothing wrong with constantly improving your system.
5. Don't let losses paralyze you. It's just part of investing. While a loss may give us reason for caution, take a step back and look at your overall goals and your overall trading approach. If your confidence is injured, then paper trade for a while until you can see that your system has merit and you can invest successfully. It's imperative that you don't simply avoid investing.
Trade Well,Price Headley, CFA, CMT - President & Chief Analyst
Followers
Monday, January 28, 2008
Subscribe to:
Post Comments (Atom)
Blog Archive
-
▼
2008
(607)
-
▼
January
(64)
- Market Analysis and Setups
- Dealing With Losses By Price Headley
- Markets Unwinding Over Sold Levels By Drifting Hig...
- Gary Kaltbaum NewsLetter
- Stocks Hitting 52 Week Highs In a Bearish Market
- No Bottom Quite Yet. Will be On Double Bottom Watc...
- SHORTS SHORTS SHORTS!!! It's Gonna Get Active Next...
- GS Analysis
- BIDU Short Setup
- Anatomy of HG Trade: Enjoy!
- Two Nice Holy Grail (HG) Setups that Took Place Today
- No Setups for Tmrw, but i will be Hunting Holy Gra...
- Comp 60 Min. Breakout.
- Market Analysis: Strong Move Off the Lows on Volum...
- Day Trades Taken Today
- RSI/MACD Divergence at Double Bottom Called the Re...
- Update on AKS Short
- AKS potenial Short
- Short Setups
- Believe it OR not!
- Not What You Want to See in a So Called Bottom
- Closed out my SKF position on the moring gap down ...
- Futures Point to Crash Open on Tuesday
- Latest COT numbers show Smart Money Net Buyers Las...
- Bo Yoder Trader Thoughts
- ONE CHART TONIGHT but it should speak volumes. Enjoy!
- The HOLY GRAIL SETUP EXPLAINED
- VXN Update
- VIX Update
- H&S Topping Formations in MTL and BIDU
- Professional trader Mike Paulenoff Analysis of DXD
- Index Charts and Analsys
- EEM Analysis
- PLEASE NOTE: My friend Ragin Cajun has asked me to...
- SP500 Analysis
- ICE Short Setup: Swing Short
- Two Nice Setups
- Bo Yoder's Analysis For Next Week
- QQQQ Flagging....
- Nasdaq Measured Move Achieved
- XAU chart
- SRS Falling wedge: Watch Carefully for a breakout.
- Index Charts
- NOTE TO SELF:
- We have ALL read this but it's Important to Read i...
- GOOG and BIDU Setups
- Top Trader Alan Farley Says:
- RIMM Setup
- Counter Trend Rally Set To take Place
- VIX ***VIX**** VIX!
- Index Charts and Analysis: All indexes are in Brea...
- SRS Day Trade
- Crude Topping OUT???!!!!
- Our 60 Min. Charts Poiting to Potential Rally Tmrw.
- Dow Sitting Right on Support
- Nasdaq Can Bounce Here.
- COT numbers are out and they continue to show Smar...
- Market and Leading Stocks Look Set For Even More W...
- Stages Of a Trader: By Bo Yoder
- Intra Day Mrkt Update: S&P500 testing support for ...
- I HATE this Chart even More Today!
- I HATE this Chart!!!
- Intra day Alerts
- Market Analysis coming into the new year.
-
▼
January
(64)
Cool Traders/Sites
- ART OF TRADING Premium Site
- Charting Trends blog
- Denarii
- Finance Trends bog
- It's Gold
- Keep Unread Blog
- LaserTrader
- momentum trader
- My Trader Interview
- Mystic Stocks
- NYC Trader
- Rant About It Blog
- stock rook goes pro
- Stock Virtual
- StockPursuit.com
- The Market Guardian
- thecrosshairstrader
- Todds Trade
- trader market blog
- Trader9999 blog
- Trading Momentum blog
- Trading With Average Jay
- Wall Street Warrior
1 comment:
Great post. It's funny how I ignored a post like this when I was starting out. Now that I have been around the block a few times, have my head handed to me far too many times (lol), I can relate to the wisdom that Mr. Headley is sharing with us.
MM
Post a Comment