Exiting Losing trades early is one of the most important parts of trading. Even though it is so important it is often overlooked by many.
Most traders enter a trade expecting to win. They expect that the stock will do exactly what they want. The big problem with that is that sometimes the stock does not do what you want it to do. That is why you should have a limit on how much money you are willing to lose on the trade before you get out.
Setting a stop sounds easy buy it is often hard to follow especially for a new trader. That is why you do not only need a specific stop but you also need to have the discipline to follow that stop.
New traders will enter a trade if it goes for them they are happy, but if it turns against them they will not get out when they need to. They hold onto the stock saying that it is a long term investment when it started as a short term trade.
They watch the stock plummet and hope that in the long run it will pay off. By holding a bad trade for such a long time they are disobeying one of the most fundamental rules in trading. Cut your losses short and let your winners ride.
Now that I got all the things that you shouldn’t do out of the way let us talk about some of the stuff that will help you.
1. Set a specific stop. Before you enter a trade you should have two plans. One that tells you what to do if you are right and one to tell you what to do if you are wrong.
2. Back test and paper trade that strategy so you can see if it works or does not. Try to develop your own trading strategy.
3. Have the confidence to follow your rules exactly, not getting out early or holding on too long.
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