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Bounce Back From Bad Trades

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Four tips for restoring capital.

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Sometimes in trading you have to pick yourself up and dust yourself off. It is the simple truth and anyone who has been involved in the game for longer than a cup of coffee will tell you the same. There will be times when you are caught with a blow up, caught in a squeeze or simply caught leaning in the wrong direction but over the years what I have learned is it is always about getting back into the ring for another round.

Thursday afternoon looked and felt wrong all day. The major averages were bumping up against medium term resistance and despite the strong bounce off morning lows to bring the averages back to even, breadth never budged from 2-1 negative. In an environment where every sign could be a canary, I heeded the potential warning and raised cash after what was a very good month. I had no problem cruising into Friday with little inventory ahead of what would probably be a Leap Day that screamed non-event.

It was a mere 24 hours later I was licking my wounds, having suffered quite a sting and seeing even my paltry inventory taken behind the shed and beaten. Recent winners like Freeport McMoRan (FCX), Shaw Group (SGR) and Nokia (NOK) were hit for close to or more than 5% as traders exited en masse. As I thought more about it, I realized that it wasn't the dollar amount lost that was so frustrating, it was that I had actually felt the move coming and didn't prepare, respond or react better. I was sent into the weekend knowing I had given back a big chunk of the month's hard fought gains.

It's important to have a routine for handling those times when not only your financial capital gets bitten but your emotional capital sinks as well.

1) Reposition: Whether you are caught in a downturn or short squeeze, removing the position is often the best way to remain objective. So often when people start to see a position run against them they freeze up and start to rely on hope rather than remaining in control of the trade. When I see stocks breaking down or acting poorly, they are sold immediately and I am able to start fresh.

2) Check the Charts and your Bias: I have written many times before that price action is never wrong. If you are caught on the wrong side of price action it is a must to re-evaluate the charts you are viewing and check any bias you may have. It is imperative to embrace the prevailing direction and avoid seeing what is not there. Having raised cash and avoiding any further significant draw, take a fresh look at the action and once again analyze your position accordingly.

3) Embrace the New Day: Trading is unique in that each and every day presents a new opportunity. This must be embraced as it is one of the features that makes trading so great. Rather than dwelling on the past, embrace the future. Each and every day presents new opportunities but not unless you are looking for them.

4) Move Slow and Small: Most people make the mistake in believing that restoring financial capital will improve emotional capital when I would argue it is actually the opposite. One can only trade at peak performance when his emotional tank is filled and confidence is high. Regardless of how long you have been trading there will be times when this tank takes a dip and before moving on to make any new financial progress, it is imperative to restore the emotional side first. The best way to do this is to move very slow and small. Rather than taking full positions, take quarters or even tenths. Paper trade if you need to and analyze results. As time goes on your emotional capital will be restored and you will soon have the confidence to re-enter the game at full speed.

If you trade, one thing is for sure, you will have good times and you will have bad times. The best way to handle the bad times is to know they will come and have a plan in place to follow so that you may bounce back quickly and put them in the past.

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Position in FCX and NOK.

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