Lessons From A Loser
As I regularly mention, I often feel there is more to be learnt from a losing trade than a winning one. You WILL have losing trades. It’s all part of the game, and so you need to get used to.
Those of you who were in the group a few weeks ago will remember this Ripple long I signaled just after it broke to all time highs. For those new to the group here’s a brief recap.
I placed my order around $0.44 with a stop at $0.33, just before boarding my flight back from Sri Lanka to the UK. By the time I landed, Ripple was trading at $0.84. I was expecting to see some hefty profits, but instead realised I had been stopped out.
My order was hit, and the market immediately spiked down and lost 30% of its value in a few hours before rallying back up. This trade would now be at a $5200 profit, but instead I lost $560. (Thankfully I know a lot of you got in this later than me and made some awesome profits!)
Incredibly frustrating, right? This is where people start to get emotional, and typically go one of two ways. They either try and revenge trade by re-entering the market with a big position size and no real plan, because they feel the market owes them something. Alternatively, they extend their stop loss as they watch the market go against them and hope that it bounces back.
Don’t Trade Emotionally
They’re both the bad choices. In this specific case, it might have paid off. The market did bounce back and rally higher but this is not always the case, and the times you are wrong will wipe you out.
In the first option, you end up trading emotionally with high risk and no real idea what your strategy is. If the market starts moving against you, you now have a loss twice as big (or more) that you have to deal with. And if you couldn’t handle the first loss, you’re probably not going to be able to handle it now its doubled in size. This leads to a viscous spiral of piling in money to save an original loss, and is one of the main causes of people blowing their accounts.
The second option has a similar effect. You start giving the market ‘a little more time’ every time the market moves against you. When it moves a little further, its easy to justify giving it ‘a little more time’ again, because now you’re looking at a larger loss. Again, this quickly spirals in to an out of control loss. You could argue I could have placed my original stop a little wider (I was only 2 cents away from not being stopped out). This may be the case, but I allowed for nearly 30% breathing room which under most circumstances is plenty!
Discipline Is More Important Than Any One Trade
Anyone who’s traded before will be familiar with the psychological battle that takes place in a trade like this. It was NEARLY the perfect trade. The entry level was low, the subsequent move was big (The risk to reward is currently at 10:1), but the timing was very slightly off.
These kind of frustrating trades will happen. You will ‘just’ get stopped out, or your order will ‘just’ get hit. The key is to not let it get to your head. Trade with discipline. In the long run it is infinitely more valuable than winning any individual trade. (Even one that costs you nearly $6000). Cut your losses early, and don’t get emotional about trades.
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