subject: How Avoiding Losses In Trading Is Key To Success [print this page] Your search on information on the topic of avoiding losses in trading tells me your head is in the right place. A large amount of amateur traders focus on materialism or in other words the opposite of risk aversion. Amateur traders ponder how much money they could make if only, and not about how they can minimize trading losses.
Is it possible to avoid losses in stock trading? No. My 10 year accuracy fluctuates between 70% and 80%. Therefore, 20% to 30% of my positions result in losses. Nonetheless, there are steps you can take to shrink losses in trading.
1 - Don't seek to make back your losses. The most awful thing you can do following a loss in trading is to decide that on your next stock trade you will make back the loss. A lot of rookie investors will put on a riskier stock trade in a penny stock or any stock they think can increase in value even higher than their initial losing position with the plan that they will make back the money they lost. Do not do that. Putting on a riskier trade means you now amplified your probability of having a subsequent losing stock trade. Don't get materialistic and lose all sensation of fear because of a loss. As an alternative examine your stock trading system. Did you hold to your stop loss strategy? Did you rationalize and defend why you were continuing to hold the losing stock even despite the fact that your initial profit thesis was violated? Make all adjustments you need to your stock trading system then move on.
2 - Stick with your trading method. Quit jumping around from trading method to trading system as soon as you incur a loss. No stock trading system is picture perfect. Continue with your trading system and make changes as required however do not leap from trading system to trading system. Get exceedingly good at a stock trading system before you come to a decision to machete it. Additionally, don't get scared and get overly conservative.
3 - Ascertain the trend of the most important indices. Use either the S&P 500 or the Nasdaq and find out the trend prior to buying or shorting a stock. The concept is to trade with the trend, not in opposition to it.
4 - Determine your profit thesis before you enter the trade. Your profit thesis should include what percentage gain you will have before you sell, and what percentage loss you will have before your sell. You must never risk more than you are seeking to gain. For example, in company ABC I'm going for a 5% to 10% gain, with a 5% stop loss. Get rid of your losses right away but allow your winning positions to ride.
5 - Enter your positions at a better level. I have found that when I go long a stock, if I'm up the first day of buying, my probability of it being a winning trade for me go way up. The entry is so critical that some famous traders have gone as far to say that they make their money on the entry, not on the sell. In the video below, I let you see a strategy I use to time my entry better. Provided you have a Scottrade trading account, you will be able to employ this tool.
