Most investors are familiar with common cliches about the markets:
“Only invest what you can afford to lose.”
“Don’t catch a falling knife.”
“Markets can remain irrational longer than you can remain solvent.”
And so on.
These sayings have stuck around.
Because whether you’re trading your own private account or running a billion-dollar hedge fund, one thing doesn’t change: we all have a limited amount of capital.
And no one can afford to let money slide off the table.
That’s why you need a clearly defined exit strategy when a trade goes against you.
Manage Your Losers… and Winners
Some traders will close a position if a trade goes a fixed percentage against them (like 5%).
Others use a dollar-amount stop loss. For instance, someone with a $10,000 trading account might allow themselves to only risk $300 per trade.
These are good methods to make sure you’re comfortable with your level of risk on each trade.
And by determining your stop losses before entering a trade, you avoid making emotionally charged decisions based on greed or fear.
However, it’s a mistake to think that risk management strategies only apply to managing losses.
Granted, capping losses is key to not blowing up your trading account.
But here’s the truth…
How you manage your winners is just as important.
If a trade initially goes your way, you may be tempted to hold on, hoping to see double- or triple-digit gains.
But when a winner turns into a loser, it’s easy to fall for the trap of digging in your heels rather than jumping out of the trade.
In doing so, you can burn big holes in your account.
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Take the Win
At The Opportunistic Trader, we aim to enter trades with strong setups. And we don’t let profitable trades turn into losers.
We take the money off the table when we see it. And while some trades result in tidy gains, not all of them are big winners.
In November, for example, we closed out an option trade on Tesla (TSLA) that lasted just three trading days for an 82.2% gain. (We covered that gain in more detail here.)
Yet earlier in the year, we closed out another option trade on TSLA for a mere 4.4% gain.
After a week in the trade – with a key interest rate decision coming the following week – we locked in this smaller profit.
That discipline is important to learn.
The key to successful trading is to continuously bank your winners – no matter how small or large.
Simply hoping for home run trades isn’t enough. Traders can only make what the market allows.
Of course, big gains are exciting.
But small gains – even just 4% – still add up in the long run and contribute to your long-term success as a trader.
In the end, how you manage your losses is important.
But managing losses is only half of the equation.
Equally focusing on how you manage your winning trades will give you that extra edge as a trader.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict