As a trader you probably have heard people talking of cutting losses quickly and managing one’s emotions, but what does this really mean? It’s hard for people to understand until they really experience it for themselves. This is why I feel all new traders should not only spend some time paper trading, but also a period of time trading a small account with real money on the line. This of course only should be after they have thoroughly educated themselves because the reality is if you go into the market with no understanding of what you are getting involved in, you have a 99.9% of losing.
You can say if XYZ stock goes against me I’m going to stop out at $X.XX, but unless you have a hard stop (which isn’t always possible) or you’ve used certain techniques to train yourself to stick to your mental stops, when push comes to shove, it’s very unlikely you will follow your plan. The big reason for this is that human beings do not like to admit they are wrong and accept losses.
99% of the time if you ask an untrained individual why they are holding onto losers they will tell you the stock(s) blew through there stop and they didn’t have time to get executed. Then they told themselves they would sell on the first bounce back to their entry but either that point came to quickly or the stock never made it all the way back to their entry. This is so common and if you have any experience in the market I am sure you have experienced this before. Most people are guilty of one of the deadly sins of trading known as averaging down.
In the beginning, nearly every new trader wants to wait for breakeven. I know I did and it definitely took some time to overcome this. Unfortunately, it’s just human nature, but I can tell you that this is an incredibly unhealthy and counter productive way to behave. What makes the situation even more difficult is that sometimes right after you stop out and take a loss a stock will reverse and do exactly what you expected. This is certainly irritating for sure but the truth is that situations like this are factored into a successful person’s trading plan.
Basically what this means is you have already factored in that you may lose $X.XX and therefore the loss is negligible and actually a necessity. This is mainly because successful trading is based on probabilities and the risk/reward dynamic. What I mean by this is you are never going to win 100% of the time and you cannot earn more than the risk free rate (currently about 2%), unless you accept risk. Anyone who thinks that some holy grail system exists, is only fooling themselves. In fact in certain markets successful traders only win 30% of the time. My system win’s about 65-70% of the time but thankfully that’s more than enough of an edge to come out ahead day in and day out.
Losses really are the key to success. When I accepted this fact that to make tens of thousands I would have to take some losses along the way, my trading account literally started to grow exponentially. Embrace the fact that taking calculated losses is okay, and start profiting in penny stocks.
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