Managing a Losing Trade: Don’t Have Feelings


Managing a losing trade is something most people do not know how to do. There is too much emotion in it for them. Leave your feelings at the door.  The most important lesson to learn in trading is how to handle losses gracefully. Most traders will inevitably encounter a string of losses at some point. The best traders might only be right 40-60 percent of the time. The best comparison to make is to baseball. The best hitters in the game only hit one third of the time they see the plate. Everyday, and I mean everyday this a 24/7 thing, large numbers of professional traders experience more losing than winning trades. Learning how to lose small and maximizing winning is essential to making it as a trader.

So for that being said one can be able to lose money. The concept to grasp is limiting that loss so it becomes irrelevant. A lot of experts advocate using stops. The problem with that is sometime they are put on to tight and if there is volatility that order gets spotted in the book, gets executed and the position moves positive again. You’re out of your trade watching it go up like a loser. Stops should only be used in a couple circumstances. Once a trade has succeeded to lock in profits and if you have determined exactly how much percent you are willing to lose.

I recently spoke of losing out on a trade. I was making a big bet on Alpha Natural a coal stock. I did all of my homework and felt like a straight up G that I am nailing it. However as right as I could have been about the company and the stock you are still subject to the effects of randomness. It was brutally oversold and I ended up catching a falling knife. I miss timed it just a bit and ended up sitting on it for too long. Brings up the next rule, a trade never becomes an investment. I broke my rule and had to eat it. I become caught up in my research and did not follow the price action. My discipline in the concept of time-value of money is what saved me which is the other rule. There are many trades to be had and money should be put to work. If the trade is flat or losing out; move on to something else. There is no love in trading.