Stocks

I Can Be Wrong, But I Can’t Afford to Be Stubborn

BrandonWendell
Brandon Wendell
Instructor, CMT

No one is perfect. One of the problems with newer traders is that they think they must be right on every trade or else they will not succeed in trading. This is so far from the truth. In fact, trying to be right all of the time will cause you to either miss out on trading opportunities or worse, hold onto losing positions. There is an old trader joke, “Do you know the definition of an investment? It is a day trade that went bad!”

Unfortunately for many people this is not a joke. They have convinced themselves to hold onto losers rather than face the reality that they were incorrect in their analysis and position. In trading, it is impossible to be right all of the time. What we teach at Online Trading Academy is to find low risk, high reward, and high probability trading opportunities. Just because a trade offers a high probability, it is not 100% foolproof. That is why the low risk is so important.

There are only five possible outcomes for any trade or investment:

1. A big win

2. A small win

3. Break even

4. A small loss

5. A big loss

Traders focus too much on trying to attain the big win. They do this at the risk of accepting the big loss. Think about any business in the world. If they accepted all five outcomes, they would not be in business for long. The large losers would eliminate any possibility for profit.

Why do traders allow themselves to have large losers? Most of the reason stems from the inability for us to admit when we are wrong. We are never going to be right all of the time. We must place stops to protect our capital and to tell us when we are wrong. Traders who refuse to use stops often complain that they get stopped out only to see price move in their favor. I would challenge that they likely had a poor entry to the trade rather than too tight of a stop. When you place your stop beyond the distal line of a strong demand or supply zone, you have a low probability of getting stopped out.

You should be in the habit of placing your stop on your platform with every trade you enter. Mental stops do not work. They are too easy to ignore. If your stop has been placed on the platform, you would have to physically cancel the stop in order to have your loss grow. This is a deterrent for many traders.

Successful traders know that they need to focus on preventing the big loser. When you hold onto a losing trade or investment, you are actually losing twice. The first is the actual money loss in the trade. This can be a stinging loss. But the second, more important loss is opportunity cost. By holding onto a losing position, you are missing out on the opportunity to profit in another trade somewhere else. We all have limited time to trade in our lives. We should be the most productive during those hours.

Going back to the three elements we should have in every trade: low risk, high reward, and high probability, the stop and proper entry into the trend give us low risk. A proper entry also gives us the high reward we want and need as well as high probability of succeeding in trades and in our trading in general. Be flexible with the market and evaluate price objectively. Do not be stubborn in holding an opinion of the markets and you will be well on your way to trading success.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.