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Many traders spend a lot of time mulling over their losses.
They replay the trade over and over, second-guessing their strategy and wondering whether they placed their stop at the right level. Or whether they cut the trade too early and should have given it some more room.
But there’s another situation that gets overlooked and can be dangerous if you’re not careful. It’s what happens immediately after you’ve closed a winning trade.
Your analysis was right, your timing was spot on, and you’re feeling pretty good about yourself. You want to keep that positive momentum flowing.
So instead of sitting back and waiting for your next opportunity, you start looking for something else to trade. You want to put those profits to work.
But if you’re not careful, things can start to unravel…
A new “AI Superchip” 50 times faster than Nvidia's could launch an AI bull market bigger than any we've seen yet and cause five little-known stocks to replace the Magnificent Seven. The man who recommended Nvidia as far back as 2016 reveals the details here – including how you could make 10 times your money if you position yourself by October 28.
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One thing I’ve learned from over four decades in the markets is that your last trade has absolutely no bearing on how your next one will play out.
The market doesn’t care whether you’ve just come off a nice win or experienced a tough loss. Every trade is a completely separate proposition and stands on its own.
Yet it’s easy to lose sight of that after pocketing a profit. You might even be tempted to jump back into the same stock, thinking that you have it all figured out.
Say a mean-reversion trader is watching a stock that’s fallen into oversold territory. It’s also trading well below its longer-term moving average. So they buy a call option in anticipation of a rebound. And sure enough, the stock bounces, enabling them to snag a quick profit.
As far as the trader is concerned, it’s a good result. They correctly identified the opportunity, executed the trade, and took the profit when it presented itself.
But now comes the tricky part.
Because the trade worked so well, they’re tempted to do it all over again. Perhaps they consider buying another call option on the same stock. However, the setup of the original trade has changed.
The stock has already rebounded, and momentum indicators are no longer showing that it’s oversold. It’s not overstretched below its longer-term moving average either.
In short, the conditions that triggered the first trade may no longer exist. If the trader jumps back in, they risk handing back the original trade’s profits.
Of course, this doesn’t just apply to trading the same stock. After a good win, it’s tempting to scan the market for any opportunity, even if nothing compelling really stands out.
Traders can start bending their own rules. They accept borderline setups that they’d ordinarily ignore. They get less picky about entry and exit points. Or they start taking much bigger positions, since they feel like they’re playing with house money. The discipline that helped generate the original profit is gone.
To be clear, there’s nothing wrong with putting on another trade right after closing a winner. If a strong setup presents itself, I’ll happily take it.
But the new trade needs to justify itself. It doesn’t get a free pass simply because the previous one worked.
I need to see a strong setup before considering a trade. I also need to know where I’ll exit. And just as important, the potential reward has to justify the risk. If not, I’m happy to let the trade pass.
Making money on one trade doesn’t mean that you’re suddenly seeing the market more clearly than before. Sure, a winning trade can help build your confidence – but when that turns into complacency or arrogance, it can quickly undo all your hard work.
So the next time you close out a win, enjoy the result. Then put the trade behind you and start again with a clean slate.
The discipline that made your last trade successful is exactly what you’ll need to give yourself the best chance of profiting again.
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.
