The right mindset and methodology for trading is critical to success…
It’s how I managed two straight decades without a losing year while helping run my hedge fund.
It’s also how I’ve helped subscribers of The S&P Trader find over 232 trades that have resulted in 100% or greater wins this year… even amid the turmoil going on in the rest of the markets.
And that’s why this week, we started a series on my seven rules of trading…
If you missed the first essay, you can catch up by going right here.
Today, I’ll share rules three and four with you…
Rule No. 3: If a trade isn’t working, cut your losses and move on.
Don’t keep holding on to a losing trade.
One of the worst things a trader can do is form an emotional attachment to a position they take.
If you’re down big on a position and you’re waiting for a turnaround to hopefully occur, you aren’t thinking rationally. Your time – and capital – are spent much better elsewhere.
Whenever you take a position, it’s crucial to establish exactly where you’ll cut your losses and exit the trade. And you must stick to this principle.
I was only able to get where I am by being “agnostic” about my positions. By this, I mean I almost never give myself wiggle room on my trading discipline.
It didn’t matter what happened to the trade after I exited it… I preserved my capital and deployed it into a new opportunity.
If you’re going to make it as a trader in the long run, you must adopt this same mindset.
And aside from the obvious reason to cut and run (limiting your losses) – taking a 100% loss on a high-conviction position can be discouraging.
These two combined losses magnify into an emotional ordeal… and lots of traders quit entirely when faced with that ordeal.
If you cut your losses at a specific, predefined point no matter what, you won’t be one of them.
Rule No. 4: Know what you’re trading like the back of your hand.
If you’re going to trade effectively, you have to learn as much as you can about each market, sector, or even stock that you trade.
For markets, think about things like its historical correlations, which historical time frames to use on charts, and what type of catalysts move the markets.
The same can be said for sectors.
For individual stocks, you should know when earnings announcements are coming out, the shares outstanding, the average daily trading volume, and above all – what sort of news catalyst or headline risk will affect the stock price.
Markets change constantly. So it’s imperative to know which factors move the markets, sectors, and stocks you’re focusing on.
If you trade gold, for example, you must keep an eye on the dollar – because those markets are historically correlated.
Even though you could be in a long gold position because of supply and demand fundamentals, if the dollar has a significant move, your gold position will also be affected in the short term.
These intermarket relationships apply to just about everything.
So be sure to do your research once you start to narrow down what markets, sectors, and individual stocks you’d like to trade.
If you don’t really know what you’re trading, you’re better off staying away. It’s a sure way to lose money.
Tomorrow, I’ll continue this series with the next two trading rules on my list…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. We’ve had a great year with The S&P Trader. Unlike the markets, which have tumbled for most of this year, we’ve not only kept our heads above water… we’ve even managed to profit in 2022.
I’d love to share more about how we averaged $1,145 a month… That’s why I recently recorded an interview to explain how this works… You can go right here to watch.