Learn how to Control Losses

Hello, Power Profit Traders!

I’m going to be brutally honest with you.

There will be loss – Say it out loud, and say it proud!

There’s not a single trader who has never experienced loss.

Perhaps it’s because of lack of education, or a technology crisis, lack of discipline or emotional stability, or even from a series of bad decision or just plain old bad luck!

The reasons aren’t as important as sitting up tall and formulating a plan to manage and cope with trading losses.

A big mistake I’ve seen in traders is not having an exit strategy for a trade they’re taking on.

Let’s fix this problem, and when you do, your confidence level can soar!

Overcoming Trading Losses

The first thing I want you to do is change your mindset about losses, mistakes or simple bad luck.

Just like life in general, we all make mistakes, and it’s easy to feel like failures when we do. To help adjust your mind set remember:

  1. Mistakes happen, and this one cost me!
  2. Learn from the mistake.
  3. Having the trade go against you although you “followed all the rules” does not mean you should give up. It won’t be the last time this happens to you.

Once a mistake has happened, simply analyze it and learn from the mistake.

Ask yourself if the loss was due to an error on your part or something that was beyond your control. We can’t control everything, but we can recognize our own errors and be sure to fix it so we don’t make the same mistake again.

It’s not a bad idea to keep a trading journal when you’re starting a new strategy. This is a great way to document mistakes, write down solutions and identify good and bad patterns.

If you’re new to a trading strategy be determined to learn it before you trade it. If it will help, you can always put on paper trades – literally write the trade in a journal, including the security, the entry, the exit and game plan. See it through to the end, and don’t get discouraged.

Remember there will always be a certain amount of loss with any strategy. Consider the probabilities.

Take on a systematic approach, which I call Rules-Based Trading. With this kind of approach, you will determine that a certain percentage of the trades will be winners and losers – and probabilities will be established.

For example, if you’ve determined that 78% of your trades can win based on your analysis, then you also know that 22% of your trades will lose.

This is important to remember when you’re first trying out your strategy in the real world. If you happen to lose on the first trade or two, bear in mind that you’ve just experienced one of the 22% trades. Now, just keep going to let the probabilities play out.

Finally, to help you overcome real losses I would have you consider Stop Loss orders for exiting trades. It can be hard to pull the plug on a bad trade because our emotions naturally fight it. If so, let the computer take you out of the trade instead with a stop loss order.

Stop Losses

You’re familiar with market and limit orders when buying and selling, but most brokerage trading platforms also allow for a stop-loss order type.

Stop loss orders are designed to help you get out of a trade if it goes against you and you’re not paying close attention to the trade. Once you have entered your trade, you can enter the stop loss order right then.

There are three basic order entries for stop loss orders.

1 Stop Market
2 Stop Limit
3 Trailing Stop

Stop Market

A stop market order is based on a price point you determine. Once the stock’s price hits your price point the order is activated, but then the order is filled at Market. Keep in mind when using this order type, you will get a fill in most cases, but you will not always get filled at the price point you entered into the computer.

Think of the stop market as a point where you insist on exiting, regardless of price.

Stop Limit

A stop limit order also starts as a price point you determine. It works the same as a stop market – once the stock’s price hits your price point the order is activated. The difference, however, is that by placing it as limit, the stock’s price must trade at your trigger price point a second time.

This means the stop limit order may not actually get a fill. Think of the stop limit as a point where you’d like to get out, but you are also insistent on the specified price. If it the market is moving too fast and you’re not filled, you’re essentially saying you’d rather keep the trade.

Trail Stop

Trail stop orders can be beneficial when the security is moving in the desired direction. The difference between a trailing stop order and a stop limit is that trailing orders are “elastic.” This simply means they follow, or “trail” the stock’s price.

Trail stop orders can be placed as a fixed dollar amount or a percentage. For example, if the stock is trading at $43.50, your trail stop could be placed at $3.00 or 3%. This would mean that as the stock rises and then begins to fall back, it can fall by $3.00 or 3% from its high and thereby trigger the order to be filled.

It’s time you take control.

There are ways to mitigate risk and control losses.

Just remember that the reasons for loss aren’t as critical if you’re learning and growing by making rules and adjustments to the way you manage your trades.

Until next time,

Tom Gentile
America’s #1 Pattern Trader

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