Are You Trading Stocks to Make Money?
I know the subject line of this post sounds ridiculous but bear with me for a minute and I will have you thinking real hard about your trading. Online trading can be the most expensive but productive psychotherapy you will ever have. Ask yourself why you have chosen to become a stock trader. I am willing to bet $1 you will say to make money, to become wealthy, to pay my bills etc.
Well let me ask you another question: Do you make capital preservation your number one priority or do only focus on how much money you can make on a trade? Trading is a marathon, not a sprint. You must preserve your energy (capital) to last in this business. I have seen it time and again, new traders (any trader without a PROVEN track record) fund an account with $10,000 and lose 40% of their capital in the first month. Why does this happen with so much consistency?
Most traders go into the trading arena trading to prove themselves right. They don’t trade to run a business. Let me ask you a question: If you owned a local deli, would you use 40% of your funding buying roast beef? Would you use 40% of your capital on that much roast beef if you have never earned that much return selling roast beef before? Of course not. The reason losses become so large is that new traders believe they need to know what is going to happen next to make money consistently. So what naturally flows from this thought course of action is that when they make a decision to go into a new position, they do so with the incorrect assumption that “know” what is going to happen so they put the trade on.
What happens next which incidentally probably WILL happen 60% of the time, the trade will move against the trade and has reached a stop loss point. Now here is what makes the difference between a trader who is trading to make money and everyone else: A trader who is trading to make money will exit the trade without any hesitation. A trader who is NOT trading to make money will keep up onto the trade because he is “right.” This is the zone where small, reasonable losses that are a natural part of the business become career ending.
This first of course assumes you ALWAYS have a predetermined stop loss BEFORE you go into every trade. If you do, monitor your trading today and pay attention if you are trading to make money or if you are trading to prove your bright examination.
Profitable traders don’t trade to be correct, they trade to make money. The only way to do this is to keep losses small in relation to the risks taken. One more good question we teach in our Equity Trader 101 course is this: If you are ever not sure about a position you are in ask yourself this: “If I did not have this position, would I want it?” The first answer that comes to mind will always be what you feel in your gut about the position. Good trading!