One of the most important things you can learn as a trader is to minimize losses.
In fact, this is one of the first things that most traders must learn, in my opinion.
Because it’s not the wins that dictate success — it’s the losses.
Easier said than done, I know…
But today I want to share with you 6 maxims to keep in mind when trading that will help you keep your losses to a minimum.
A single loss can wipe out months of gains
There’s not a single trader who hasn’t heard the mantra “cut losses quickly” over and over again.
… Yet we’ve all been guilty of ignoring this rule.
Losses can escalate very quickly and wipe out months of gains and diligent trading.
Keep this in mind next time you’re on the losing side of a trade.
What starts as a “small” loss can quickly wipe out months of hard work if you let it get out of control.
Traders Should Study Their Losses
Traders are always looking for the next great trade.
This means that as soon as a losing trade is over they forget about it and focus on a new trade.
Your trading history is filled with super valuable lessons.
Take 30 minutes of your day to study your losses so you can avoid them in the future.
Reflect on why you lost that trade and what can be done to prevent this type of loss in the future.
Don’t add to losing positions
“When you find yourself in a hole, the first thing to do is stop digging.”
It’s very easy to become stubborn when faced with a losing trade.
We’ve all been there.
We figure the trade will turn soon, and the last thing we want to do is sell at the bottom or cover at the top.
Some traders will even double down with no real argument to support that decision.
Remember, a stock can always go higher when you’re short and lower when you’re long.
Don’t be stubborn. Take the loss, study it and move on to the next one.
Always Have a “Stop” In Place
Stops provide the foundation for a risk management strategy.
And it’s an essential element in any trading plan.
You should know your stop price before you enter any trades, whether it’s a mental stop or a stop loss order.
Focus on Your Best Trading Setups
Focus on your highest probability setups and avoid any subpar setups.
Go back to your trading history and analyze your biggest winners. Find the common denominators on your winners, and look for new trades that share those elements.
This can automatically increase your percentage of winning trades.
Always Trade With a Free and Clear Mind
If you’re tired, anxious or upset, your trading is likely to suffer.
If you’re not in an optimal mental condition to trade, don’t trade!
You should also avoid “vengeance” trading — that is, trying to make back losses, or forcing a trade just to make money.
Hopefully you found these useful, and maybe you’re already implementing some of them in your trading.
But if you feel you need some help with risk management…
Hawkeye can help tremendously.