Taking An ‘L’ Might Be The Best Result

Most traders have a bullish mindset, and usually for good reason.

Over the last 50 or so years, the market has moved higher.

There will always be declines, but the market has always recovered losses and moved to all-time highs.  That’s just a fact anyone can see if you look at a long-term chart.

The ‘good-times’ never last forever, and corrections, like we have seen in the past weeks, are evidence of that.

Here is some help from own trading philosophy:

  • Losses must be kept to a minimum so they do not do irreparable harm to your trading account.  It is easy enough to make trades when the risk-benefit is in your heavily in your favor.  Many times traders can manage this by picking a position size they are comfortable with.
  • You should never expect to see profits on every trade, smart investors use a month over month, return as their goal.  Markets are fickle and nasty volatility should be avoided.
  • Every trader’s journey is unique, and it really doesn’t matter which option strategy you decide to trade. Learn to adopt a strategy that is appropriate for your trading style and current market conditions. Don’t force trades.  Even if you lost money the last time you traded that stock, it does not mean that you should force a borderline trade in that same stock — just because you want to get back to even. Initiate only suitable trades with a decent risk/reward ratio. Don’t adjust positions because you refuse to take a loss. And never, ever, take extra risk to avoid locking in a loss.

  • Abandon traders if they are either losing money or become too risky.  You should not increase position size in an attempt to get even. Do not hold, hoping that the stock price will reverse direction, allowing you to recover any losses.  This is the hardest one to teach investors.
  • When you believe one stock offers a good trading opportunity, then that’s the place to invest your money.  In the end, you will be happy to get out of the risky position and move to a better one. Keep in mind that your goal as a trader is to make money for your account; and not from that one specific trade.

The ‘need’ to recover losses from one specific stock — or one single position — blinds many to finding a different profitable opportunity.

Isn’t it better to earn $1,000 from a new trade than to spend an equal amount of time (and investment dollars) to successfully recover a $500 loss?

The latter may make you feel good, but it would leave you with $500 less in your account.

When you find yourself struggling in the market, there are steps you can take:

  • Stop trading.  Walk away and clear your head.  Never trade filled with emotion unless it’s new love.  Then trade your heart out!
  • Focus on your objective.  Keep that focus on your trading style and wait… Recovery of recent losses should not be your objective. In the end, your goal is to make money!

— The Option Specialist

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