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.

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