We were sent an email recently from a part time investor which highlighted a problem many people experience. Here is an extract from the email:
“I had a trade on the ftse and I was up £180 and the greed once again got on top of me and I lost £565. And its been like that all my trading career. I make my £100 a day and I say to myself, I can make a tad more and I lose it”
There is no worse trade than having a profitable trade, only to end up taking a loss on it. So what can be done to avoid this? Here are a few tips that every trader should follow:
Have a trading plan – know your risk and your reward before entering the trade. By clearly identifying your profit target and your stop level before executing your trade you give yourself far more chance of actually sticking to it. Many people enter trades without considering what they are looking to make or lose. Have a realistic expectation and if a trade reaches the predetermined level then get out.
Book Profit – If a trade is in profit then consider getting out of some of it. By securing some profit it will give you a buffer to fall back on should the trade begin to go against you. This is known as “scaling out” of the position.
Conviction Level – There should be a reason for every trade you make. Never enter a trade purely for the sake of it. Before entering the trade ask yourself “on a scale of 1 to 10, how confident am I in this trade?” If it is a high conviction trade you should adjust your target and your stop accordingly. For low conviction trades keep a tight stop. Too many people are prepared to lose the same amount on a low conviction trade as they are on a high conviction trade. This makes no sense at all!!
Don’t be stubborn – If the market begins to show signs that it is going against you then get out! Don’t get married to your position (i.e. blindly stick to your view). Regardless of whether or not the fundamentals/technical indicate a specific direction, if the market chooses to ignore it then it will. Remember, the market can remain irrational longer than you can remain solvent! The earlier you accept that you’re wrong, the sooner you can go with the trend and start making money! Don’t forget that stubbornly holding onto a position will come at an opportunity cost – by remaining in a position, you will inevitably end up missing other trades.
First loss is the best loss – In a similar vein to not being stubborn, if the market goes against you, get out! Don’t hang around. Taking a small loss will hurt a lot less than a big loss! The quicker you can admit that you are wrong, the less it will hurt. If you are still confident that the market will move in your direction, use the opportunity to get in at a better price. Also, never forget that the second best trade you can make is a scratch (break even trade).
Keep a trading log and evaluate! – It is good to get into the habit of writing down all of your trades and objectively evaluating how they went. Keeping a record of what was learnt will encourage you to continue doing that which works, and stop doing what is costing you money. The ability to provide an honest evaluation is critical to the development process –taking a step back and considering all elements of a trade (the good and the bad) will encourage you to learn from your experiences. Avoid evaluating in the heat of the moment (for example in the immediate aftermath of a bad trade), and avoid being too critical of yourself. If you treat all trades as a learning experience as opposed to a judgment on your skills, your progression will be boosted.
Be Disciplined – stick to your predefined strategy at all costs. If a trade is in profit, under no circumstances should you ever take a loss on it. If it looks like it is beginning to go against you then get out! Likewise, if a trade has gone against you, don’t blindly hold on expecting it to come back. When it reaches your predetermined stop level you must ensure you follow through with your plan and exit the trade.