‘Winning consistently in the stock market is directly related to how successfully one loses.’ Have you heard of this?
Just to make this revolutionary truth stick, I’ll say it in another way: knowing how to lose correctly is the cornerstone of any successful trading methodology. So enjoy the ride while it lasts. this may sound harsh, but this is reality. To think that you will not lose in this game is deluding yourself. Losing is a very real (sometimes frequent) part of trading, and knowing how to do it right is the key to survival. Anyone can luck into the occasional big winner. When price of a stock goes up, the player makes money, and all is well. That is simple. But what about when a stock goes down? Do you sell? and if so, where? when? and how? Only the winning trader has these questions answered before he takes the trade. The novice, like an ostrich, sticks his head in the sand and ignores the downside. Why? Because he has no predefined plan to deal with it. If all traders adhered to a stop loss strategy, there would be forced into handling the downside like a professional.
It is extremely important to enter a trade with a predetermined level at which we will cut our losses. Will some stock rise as soon as our stops are acted on? Absolutely. These distasteful occurrences are a permanent part of the game that we have chosen to play. But rest assured that we will never be down 5, 10, 15 or 20% in anything. and never will we suffer the risk of ruin. In fact, as a result of a stop loss strategy, we tend to lose less than 3% on each trade. Yes, we may get stopped out frequently when the market get sloppy, but when the good times start to roll again, we will be the first on the bandwagon.
Each time a carefully chosen stock gets stopped out, you have not lost, you’ve won. Being stopped out does mean you have won. What have you won, you ask?
First of all, traders who have been stopped out of their trades have won a good part of their money back. These are plenty of past traders who wish they could claim such a thing because they had no stops, and they are now part of a forgotten history.
Secondly, traders who have been stopped out have won another chance to get it right. Again, there are countless individuals, not longer with the market, who do not have any more chances. They can only wish they did.
Lastly, traders who have been stopped out have won the greatest gift market players can receive; respect, self-respect. Each time traders adhere to their plan, their discipline grows stronger and the power of their resolve increases. When these traders do what they set out to do, their stock may not have risen, but the stock in themselves has. These are gifts that will pay great dividends in the future. Losing because you adhered to a well-placed stop is not losing at all. To our way of thinking, it is winning.