Ask any new trader why he or she did not make a profit and you will get a wide variety of answers. Getting an honest answer at all may take some shrew interrogation. Traders are like anyone else. The majority don’t like to admit their mistakes. And unless the market is in full “bull run” mode, most newbie traders will fall short of their desired goal of making a fortune by year end. Falling short is just a nice way of saying that there is now less money in the trading account than there was at the start. If your situation sounds similar, don’t despair. You are not alone.
It is interesting to discover, when honest answers are finally revealed, that trading methods differ in many respects but one common mistake transcends them all. What is that one major trading error that if avoided could actually turn all those red numbers to green? Before answering that question, keep in mind that many successful traders have just as many losing trades as winning trades. That being said, not cutting your losses early when a trade goes wrong is the common thread that ties all losing traders together. Letting your profitable trades run and cutting your losses early is a key fundamental that should be stamped on the forehead of all that enter the world of stock trading. But of course, as with most simplicities in life, this is easier said than done.
How does one avoid this common pitfall? Ask yourself if you would rather be right, or would you rather make money. Be right or make money? If you are not right you must be wrong and being wrong mean that you made a mistake. Admitting mistakes can be painful but what about losing money? You will have to determine which of these choices cause you more pain. If losing money hurts more, learn to admit your mistakes and get out of a trade that goes against you. A single losing trade often wipes out several profitable ones. Don’t let this happen to you.
Here are three steps you can take to prevent this common pitfall and improve your trading performance:
1. Before making any trade, determine how much of your capital you are willing to lose. Set stops. If you use a mental stop, stick to it.
Remember that you entered the trade expecting it to go up. If it did not, you are no longer in control of the trade. Admit your mistake and let it go.
2. Keep records of all your trade activity. An Excel spreadsheet is great for this.
Include why you made the trade. Was it based on a special chart pattern,
earnings, a special stock screen, or a tip from your Uncle Fester? This information is of great importance as you will see trends based on this criteria. In addition, you will be able to make informed decisions regarding the validity of the method chosen.
3. Include in the spreadsheet the general market trend during every trade. Was the market trending up or down on the days you held the stock? This will prevent you from looking at your good trades with rose-colored glasses if the market was flying high. Conversely, it may explain your lack of success if you were fighting the tide by trading against the market.
Remember that deciding that you must be right and holding a losing stock will waste time. Waiting for a stock to return to the level that it was originally purchased could be a long term decision. The worst case is that this strategy will wipe out your trading capital…fast.
Do yourself and your trading account a favor by admitting mistakes and cutting losses. There will always be another trade.