When to Recognize and Close Losing Trades
When to Recognize and Close Losing Trades
When to exit losing trades used to be one of the biggest struggles I faced as a newbie and losing trader. It seemed like no matter what happened in a trade, once I had a position on I held onto it forever. It didn't matter how low it sank, if I was in, I was in.
Today my trading is a lot different. That's because I have figured out that the best time to get out of a losing trade is: AS SOON AS I CAN! LOL That may sound like a joke, but it isn't. The answer to curbing a lot of my past losing ways and increasing my profitability is to simply exit losing trades at the first hint of trouble or, at the very least, exiting as soon as I RECOGNIZE my trade is loser.
So how do I tell if I'm in a losing trade? Easy. If what I was looking for on the way in isn't happening, I am in a losing trade. For example, let's say that I know going in that I'm looking for a breakout on increasing volume and a strong trend to develop.
But instead of that killer run on excellent volume, I get a trade that breaks out a little, hands above the breakout zone for days and then slides back beneath the breakout area. How long am I going to stay in that trade?
Answer: not long! Right?
Think about it: does anything about that trade even remotely resemble what I am looking for? Nope. It looks like a lame duck and could be ripe for some serious crashing. COULD this trade turn around and become great?
Yes! Of course, ANYTHING and I mean A-N-Y-T-H-I-N-G can happen in the market. But let me ask you this: am I looking for trades that COULD turn around? Am I looking for trades that COULD be great? Or am I looking for trades that ARE great? That's right. I'm looking for trades that are great.
I'm looking for trades that break out. Consolidate. Push higher. Breakout. Consolidate. Push higher. I am NOT looking for trades that breakout. Fizzleout. Sink lower. No. That is NOT my trade model.
So does this mean that every breakout rockets out of the starting gate and onto incredible gains? No way! Only the great ones do that. Some break out and just sit there for awhile. Some break out and pull back to test the breakout area before rocketing off. But NONE of them breakout, and sink back, and keep on sinking. NONE of them.
Think of it like this. If you're going to a car lot looking for a BMW and all you see are Toyotas -- have you found what you are looking for? Nope. If you're having difficulty deciding, I promise you that pulling up a couple photos of both cars will help.
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