Each Monday and Wednesday afternoon in the T3Live Active Trading Mentoring Room I go over a key lesson from the Active Trader Course that applies to recent market action. In addition to getting hands-on guidance navigating the market each day, it is important for all of our students to continue to learn each week. Yesterday in the room I did what I thought was a very valuable lesson on "How to Take a Loss."
Sign up for a free 5-day trial in the Active Trader Mentoring Room to test drive it yourself.
Most novice traders don't understand what makes a successful trader... successful. Novice traders like to focus only on how to identify and manage winning trades because that is the "sexy" part of the business. Professional traders know better. In my opinion, every trader or blind squirrel can make a winning trade but successful traders are defined by their ability to take a loss.
Taking a loss can be painful and humbling. Nobody ever wants to take a loss. However, taking your medicine is a very real part of this business. There is no room in trading for hurt feelings. If you gameplan a trade and it doesn't work out in your favor, it does not necessarily reflect bad on you as a trader or a person. You are not dumb because a trade goes against you.
In fact, to be profitable as a trader, you don't even need half of your trade ideas to work out in your favor. All you need to do it have a system for cutting your losers short and letting your winners run. I know what you're saying: that's much easier said than done. However, this business is as simple as you let it be. Trading is simple, but never easy.
The first step before you place any trade is creating a profit target and hard stop-loss. Every idea you generate should have a favorable risk-reward parameter. Many successful traders say they will never enter a trade without 2-1 reward-to-risk, but at VERY minimum the potential reward should exceed the potential loss.
Your profit expectation may change based on the speed of the trade (although it's prudent to at least take a healthy portion of profits at your initial target), but your stop-loss should NEVER change. We do not believe in "averaging down" into positions. In my opinion that type of mindset is a one-way ticket out of the business.
For more detailed information on how to handle a losing trade, watch the video of yesterday's lesson. This lesson is only one of many that I have taught in the Active Trading Mentoring Room this year, and we will keep the momentum going into 2013.
If nothing else, make sure to sign up for a 5-day free trial of our Active Trading Course Mentoring Room. When it comes to trading, I believe that any money spent on education will ultimately be money saved in the market--and then some.
*DISCLOSURES: Evan Lazarus is short SPY, REGN.