A common mistake new traders make is being unwilling to set stops. Blinded by the thought of quick, easy money they are unwilling to think about the other side of a trade……..the loss. They enter the trade and see it quickly go green …they can see how trading is going to easily solve many of their money problems. No thought is given to how much they could lose without having a stop in place.
The green trade turns red with a small loss, but the trader is not worried…….it is just a small pullback……the trade continues to fall further and further into the red. Worry starts to set in now, the trader thinks “I will sell once it gets back to my entry so I am even.” But that does not come and the loss continues to get larger, panic and despair set in…..the loss in the trade becomes all consuming, the trader can not stop thinking about it and all of the “what if’s” that come along with it. If the loss is large enough the trader may not sleep, or the trader may wake up at night thinking about it……the trader can not think clearly about any new trades. There is a complete loss of confidence, and that losing trade is eating up all of the trader’s mental capital, both in trading and outside in day to day life.
When I was a new trader, I had been there on more occasions than I would like to admit. There would always come a point when I couldn’t take the pain anymore and I would swallow the loss and cut the trade…while doing that never took away the pain of the loss, it was always a tremendous weight off my shoulder. Mentally I could start thinking again about other things beside the big red loss in my account. Your mental capital should be guarded second only to your trading capital.
Please use stops …they protect your trading capital as well as your mental capital. There is a risk with every trade, some will work and some won’t…taking small losses keeps you in the game.
A great point to stress and discuss. From my experience, as a mostly intraday trader, I have learned that the more time I spend in a trade that’s against me, the more my mindset deteriorates. My trade management of open positions suffers, and I have difficulty seeing opportunity.
An experienced, profitable trader I know likes to say, “Small losers are your best trades.” Though I know we could disagree with his literal statement, his broader concept is very meaningful for me.
I really like this reminder. Unfortunately, there have been enough times when my stops either get ‘blown through’ so they were useless or they get hit within the same day the stock would have proven to be a solid success. I realize that just means to learn how to use stops better, not to eradicate them completely.