Sunday, October 21, 2012

The Most Important Lesson In Trading

Hi folks: An important note that i'd like to share ahead of next week.

While we had a solid week this week(11 trades: 9 winners and 2 losses), we did incur TWO losses in SINA and LULU. But there were VERY valuable lessons to take from BOTH trades. As you  know by now, when a stock gaps DOWN THRU my stop loss, i always urge people to simply OBEY THE STOP LOSS; SELL immediately at the open and MOVE ON. Now, while the SINA trade was a loss of around 1.60% loss(very small loss) if you sold a few seconds after the open(like the alert suggested you do). Some traders did not sell it and SINA luckily reversed back up and some traders LUCKILY sold it for a gain a few minutes later(pheewww, keep in mind, that was lucky).
In the chat room and in the emails, i always recommend you respect the original stop loss and sell it at the open because all it takes is ONE TIME for you to "break the rules" and you can get punished badly. The LULU trade was a perfect example of this, it gapped down below the stop loss level(at which point you must sell it immediately). But i am convinced that a few traders remembered what happened with the SINA trade, where it gapped down below the stop loss area and quickly reversed higher. I have no doubt in my mind, that some were thinking(hoping), the same thing would happen with LULU. Keep in mind guys, IT ONLY TAKES ONE TIME for it to not reverse and it could hurt. That's all it takes, JUST ONE TIME.  

In the end, its trading 101 really: OBEY THE STOP LOSS: as sucky as it may be, we must obey the stop loss. The pain from not obeying is really not worth it cause it ONLY TAKES ONE TIME. LULU stopped out at the open for a 2.60% loss(very respectable loss here), it closed down on friday with a 7.50% loss = NOT acceptable to incur that kind of loss in my book).

The hardest part about trading is TAKING A LOSS. It's hard not only because it means that you will have to incur a loss that will decrease your account size but it's hard mostly because you want to be RIGHT! Nobody wants to be wrong. 

Nothing wrong with getting into a mistimed trades: That happens to EVERYONE regardless of experience. Nothing wrong with making mistakes or bad entries in trading but the biggest mistake one can make is STAYING with a mistake because you refuse to sell at a small loss or obey the initial stop loss. When ego is on the line, as traders, many of us do things we otherwise wouldn't do. Nothing wrong with losses as long as they are SMALL. Recovering from a SMALL LOSS is a whole lot easier then digging yourself out of a big hole, never forget that. Recovering from a large loss is a nightmare and it hurts many traders mentally and financially. Many traders will learn this lesson many times over and over again the HARD WAY unfortunately. The best thing to do is to take the initial SMALL LOSS as sucky as it may feel initially. Bite the bullet and MOVE ON. You will instantly feel a sense of "relief" and you can now focus on BETTER AND BIGGER IDEAS and not be stuck in something that is not working and hoping, praying it turns. 

Cut the losses early/quickly when possible and you will recover and then some later once the better trade setups start lining up again. You will get better trades eventually but you gotta give yourself the chance to win over the longer term and that means taking small losses on mistimed trades.

Thanks for reading.


Anonymous said...

Besides taking your medicine before an even bigger loss occurs, I think there's another issue to consider. All losses occur instantaneously. Whether you have booked the loss or not, it's yours. So the real issue presenting you is whether leaving what's left of your position in the current failed trade is preferable to finding another, more promising, trade. If you have any faith in your ability as a trader, in most instances, the answer is going to be that you can find a better trade than the present one, so just take the loss (that you have already incurred) and move on. You see, the language we use implies the loss is in the future, but in reality, that money is already gone and the coming day's trading can equally be traded as a new trade. I guess the real question for you is this: "If I were flat here and hadn't lost a dime on this stock, would I plan an entry here?" If that answer is "Nope" then get out.

Brian Fortin

Anonymous said...

Fantastic comments here Brian! Absolutely brilliant and thanks for sharing this.

Trader Stewie.

Anti Money Laundering said...

In trading there can be ups and downs. Everyone experience that for everybody to learn and grow. But having the best the decisions could sometimes be very hard. The most important thing is that you enjoy what you are doing and so everything will follow.

David Aw said...

Great advise on the stops. It is not only fundamentally the reason why most traders are not profitable but also it is robbing you of the chance to profit from another trade.

It is also emotionally tiring to hold on to a losing trade with roller coaster feelings of fear and regret and hope.

Best to cut this pain n look forward to a better opportunity.

Top sales person constantly look for people to say no. Because they know the yes is near.

read you from Tim Skypes.

Share Tips said...

Great post ! hope you will post more information about trading.

Stock Tips said...

In Trading its a fact of profit & loss goes on continuously, some when we get profit & sometimes we get loss. so here I found a very important lesson, keep it up to post like this informative post.Thanks!!!

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