The right mindset is critical to trading success.
It’s how I managed two straight decades without a losing year while running my hedge fund.
And it’s how my fund brought in $95 million in profits even during the 2008-09 financial crisis.
That’s why I’ve come up with a list of rules to help traders develop more consistent performance… which helps you stay in the game.
Last week, I shared the first two rules. You can find that here if you want a refresher.
And today, I’ll share rules three and four with you…
Trading Rule No. 3: If a Trade Isn’t Working, Cut Your Losses and Move On
Don’t keep holding on to a losing trade.
One of the worst things a trader can do is form an emotional attachment to a position they take.
If you’re down big on a position and you’re waiting for a turnaround to hopefully occur, you aren’t thinking rationally.
Your time – and capital – are spent much better elsewhere.
Whenever you put on a position, it’s crucial to establish exactly where you’ll cut your losses and exit the trade. And you must stick to this principle.
I was only able to get where I am by being “agnostic” about my positions.
By this, I mean I rarely give myself wiggle room in my trading discipline.
It doesn’t matter what happens to the trade after I exit it… By closing it out, I preserved my capital and was able to deploy it into a new opportunity.
If you’re going to make it as a trader in the long run, you need this mindset.
Aside from the obvious reason to cut and run (limiting your losses) – taking a 100% loss on a high-conviction position can be discouraging.
Losses can turn into an emotional ordeal… and lots of traders quit entirely when faced with that ordeal.
If you cut your losses at a specific, predefined point no matter what, you won’t be one of them.
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Rule No. 4: Know What You’re Trading Like the Back of Your Hand
If you’re going to trade effectively, you have to learn as much as you can about each market, sector, or stock that you trade.
For markets, think about things like historical correlations, which time frames to use on charts, and what type of catalysts move the markets. The same can be said for sectors.
For individual stocks, you should know when earnings announcements are coming out, the shares outstanding, the average daily trading volume, and what sort of news catalyst or headline risk will affect the stock price.
Ultimately, you need to know which factors move the markets, sectors, and stocks you’re focusing on.
If you trade gold, for example, you have to keep an eye on the dollar – because those markets are often correlated.
You could be in a long gold position because of supply and demand fundamentals. But if the dollar has a significant move, your gold position will also feel the impact in the short term.
These intermarket relationships apply to just about everything.
So be sure to do your research once you start to narrow down what markets, sectors, or individual stocks you’d like to trade.
If you don’t really know what you’re trading, you’re better off staying away. It’s a sure way to lose money.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict