36. Losers average losers.
It is a deadly habit for a trader to average down on a losing trade when they are
already proven wrong. Being rewarded for this behavior with a rally will just
reinforce
the bad habit, and there will come a time when it never recovers and
the account is destroyed.
Adding to a losing trade is fighting a trend, not accepting when you’re wrong,
and tying up capital that could be used to make money on good trades.
Get in the habit of never adding to a losing trade,
learning from the experience,
and moving on to the next trade.
37. Never allow a statistically significant unrealized gain to turn into a
statistically significant realized loss. – Richard Weissman
Once you have a sizeable winning trade, it needs to
stay a profitable trade with
the use of trailing stop losses or price targets for profit taking. The only way to
exit with a profit is to have an exit strategy that enables you to lock in that
money while it is still on the table.
There is a window of opportunity for locking in gains,
and you have to establish
parameters for this because winning trades have shelf lives, and they usually
return to where they started. If you’re long the $SPY as it approaches the 70 RSI,
it’s a good time to look at locking in a profit from an uptrend, for example.
If you’re long a strong growth stock that has been
going up for ten days straight,
it fails to make a new high, and is going to close below the 5 day EMA for the
first time in ten days, it’s time to consider locking in your profits.
Many traders
focus on the entries, but money is only made on the exits.
Get in the habit of having a plan to lock in profits with a winning trade, and
never allow a big winning trade to reverse and turn into a losing trade.
