Four Strategies for a Losing Trade
Don't get mad - but don't get even, either.
Many investors haven't fared well over the past year, due to market volatility. And because most tend to trade from the long side (they own mutual funds), the bear market hasn't treated them kindly. This is an appropriate time to share some of my trading philosophy.
1. To succeed over the longer-term, losses must be minimized. Thus, risk management is the essential skill for any trader.
2. Your trading/investing goal is to make money. Your goal is to make your account value grow month after month.
3. It doesn't matter from which specific stocks you earn your profits. No stock "owes" you a profit. If you lost money the last time you traded that stock, it doesn't mean you should force a borderline trade in that same stock in an attempt to "get even."
If you believe that one stock offers a good trading opportunity, then that's the place to invest your money. You'd be better served to get out of the risky position and move to one that you believe has better profit potential. After all, your goal is to make money.
This is a difficult concept for some people to grasp. The "need" to recover losses from one specific stock blinds many to finding an opportunity to make money from another stock. Which would you rather do: Recover losses, even if it takes a year, or earn 3 times as much money by trading a different stock?
The answer should be obvious to all, but some refuse to acknowledge the truth. Remember: It doesn't matter from which specific stocks you earn your profits. (This cannot be repeated too often.)
Jeff White, of The Stock Bandit, adds:
"You might be struggling in this market right now, and if so, remember that there are a couple of things you can do. First, stop trading. Close out your losing positions and clear your head for a little while. ...Second, regain your focus. Remind yourself what you're aiming to do with your trading, what your style consists of, and what you need to see before taking new trades. If you don't see it, don't push any buttons! And finally, don't try to 'get it back' quickly. That is the fastest way to compound your problem and double or triple the size of the hole you find yourself in."
4. If you have a losing position, and if that position exits your comfort zone (too much risk going forward):
- Don't add to a losing trade by increasing your position size in an attempt to get even.
- Don't hold in the hope the stock will reverse direction, allowing you to recover your losses.
- Don't adjust the position solely because you refuse to accept a loss.
- Adjust the position only if you still want to own a position in this specific stock (or index), and adjust it to a new one that suits you. That means both the potential risk and reward for the future must meet your requirements for opening a new position.
- What's lost is lost. Don't dwell on it. If you cannot find a position you want to own, then forget this stock and find another.
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