Most investors tend to trade from the long side. That’s not working well right now because this market has been in a recent downtrend. I think this is an appropriate time to share more of my trading philosophy.
1) To succeed over the longer-term, losses must be minimized. Thus, risk management is an essential skill for any trader.
2) Your trading/investing goal is to make money. You want to see your account value grow month after month.
3) **It does not matter from which specific stocks you earn your profits.
4) No specific stock ‘owes’ you a profit. If you lost money the last time you traded that stock, it doesn’t mean you should force a borderline trade in that same stock in an attempt to ‘get even.’
5) If you have a
losing position and if that position exits your comfort zone (too much risk
a. Do not increase
your position size in an attempt to get even.
b. Do not hold,
hoping the stock will reverse direction, allowing you to recover your losses.
c. Do not alter
(adjust) the position just because you refuse to accept a loss.
i. Adjust the
position ONLY if you still want to have a position in this specific stock (or
ii. Adjust the
position to a new one that suits you. That
means both the reward potential and risk must be acceptable. I’m referring to
the potential risk/reward for the future. What’s lost is lost. Don’t dwell
on it. If you cannot find a position you
want to own, then forget this stock and find another.
6) **It does not
matter from which specific stocks you earn your profits.
7) If you believe
that one stock offers a good trading opportunity, then that’s the place to invest
your money. Referring to #5 above, you
would be better served to get out of the risky position and move to one that
that you think is better. After all,
your goal is to make money for your account.
This is a
difficult concept for some people to grasp. The ‘need’ to recover losses from one specific stock blinds many to finding
an opportunity to make money from another stock. Which would you rather do: a) Recover losses,
even if it takes a year, or b) earn three times as much money by trading a
different stock? The answer should be
obvious to all. Remember, it does not
matter from which specific stocks you earn your profits. (This cannot be
repeated too often.)
“You might be struggling in this market right now, and
if so, remember that there are a couple of things you can do. First, stop
trading. Close out your losing positions and clear your head for a little
while. It’ll be well worth it, both monetarily and mentally. Second, regain
your focus. Remind yourself what you’re aiming to do with your trading, what
your style consists of, and what you need to see before taking new trades. If
you don’t see it, don’t push any buttons! And finally, don’t try to “get it
back” quickly. That is the fastest way to compound your problem and double or
triple the size of the hole you find yourself in.”