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Ever bought into a stock right before it tanks?
Or perhaps you’ve sold out of a stock just before it goes on a massive rally. Like Nvidia, for example, which is up roughly 376% over the past three years.
Chances are, if you’ve been around the markets long enough, you’ve experienced both scenarios.
It can mess with your head and leave you totally frustrated, especially if you play out the trade over and over.
And while you’re kicking yourself about the previous trade, you’re likely missing out on plenty of other setups.
Learning to put a line under a trade (whatever the result) and quickly move on is key to making it as a trader. It’s something I learned the hard way.
So today, I want to share how a shift in my approach to trading led to life-changing gains. It ultimately saw me go on to great success, with Barron’s rating my hedge fund in the top 1% multiple times.
It also saw me featured in Jack Schwager’s Hedge Fund Market Wizards. I’m in the chapter right after billionaire Ray Dalio…
A common mistake new traders often fall into is thinking that trading is about bagging big gains.
That’s the approach I took when I started out trading in the pits of the Chicago Board Options Exchange almost 40 years ago. I’d jump from one trade to the next, making outsized bets that had little chance of succeeding.
No prizes for guessing how things panned out…
I tore through my trading account multiple times over. Then I had to face the arduous task of starting again… and again.
What I didn’t appreciate at the time was that those big wins don’t come around often. For every Nvidia, countless other stocks do practically nothing at all.
But if you keep looking for the next Nvidia, you’ll miss other less exciting but still profitable trades.
The way I turned things around was to stop looking for big wins. Instead, I did the opposite…
I started treating trading as a business where I needed to bank regular gains.
By taking regular profits, no matter how small, I got into the habit of trading profitably.
Whether it was just a $200 or $300 profit to start with, wins soon accumulated into something much bigger.
Before I knew it, I’d banked my first $1,000 winner… and I knew that I was on my way.
Along with regularly banking profits, I refused to ride any losers. The moment a trade went against me, I exited as fast as I could.
Whether my trade was profitable or a loser, I put a line under it and moved on to the next trade. That way, I wasn’t holding onto any profitable trades longer than I should in the hope of unrealistic gains. Nor did I hold onto losses in the hope that things might turn around.
Instead, I got in the business of regularly making money while immediately capping any losses.
Do this too, and it might surprise you how quickly things turn around.
Hunting for outsized wins might suit some traders.
The problem is that they don’t know how long it is until the next Nvidia comes along. Unless you’ve got a massive account behind you, then it’s too risky to trade that way.
Instead, I went into the market each day with the mentality that I was going to bank whatever gains I could, even if they were small. And my account slowly but steadily began to build.
The more profits I banked, the more I could allocate to my next trade. That helped snowball my account to something much larger.
If you treat trading as a business – and not a casino – you too will likely see your account steadily grow.
Remember that there are unlimited opportunities in the markets to make a profit. What’s more, those opportunities are out there every day.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
