Most investors have what is known as positive beta to the overall market.
Beta is the term in finance that describes the relationship between a portfolio’s return and the market as a whole. This means even the best individual stock picker in the world could lose money if the market has a day like yesterday and today. Over two days losing almost 5% with every sector falling more than 3%.
What Can You Do When Your Trades Turn Ugly?
I have traded options professionally for more than 25 years, and to me, the one simple key to having a long career is discipline.
Discipline is paramount for success over the LONG term. Every trader has a limited amount of capital (money) available to trade. The trader without discipline will make trades, be quick take the profit when he is right, and call his trade an investment when he is wrong.
This action of cutting winners and letting losers run will almost certainly eventually lead to trading capital being wiped out. The natural tendency in humans is to take profits. Learning to cut losing positions and let winners run is a skill that must be developed.
Have you ever caught yourself saying any of the following statements to justify inaction on cutting a losing position?
- I am holding on to this trade and hoping it recovers
- If I didn’t own it already I would be buying it here
- I just want to get back to break even and then I will get out
- The market is wrong
Everyone has said these things at some point in their trading lives, but let me tell you, any time your position requires HOPE it is likely HOPELESS!
If you say I would buy it here and you don’t want to buy more – you may be better off selling what you have!
The market doesn’t know or care what price you bought a position. The market price of a stock is the value of that stock right here, right now! Even though the market presents opportunities, market pricing is not WRONG.
While I am not giving buy sell or hold advice, I would strongly recommend that when you find yourself staring at a losing position consider selling it! If you close it out completely, you can really make an honest determination when you ask yourself, “Do I REALLY want to own it here?”
Too often I see traders let their existing positions do the talking for them. Don’t fall into that trap!
See the OptionsHouse How-To tutorials on how to use stop order and trailing stops [VIDEO] to learn the mechanics of cutting losing positions.
Keep your discipline!
Photo Credit: Pandiyan
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