If there is one thing traders have to be great at, it is rationalizing their decisions. A more honest, humble way to say it is to cut losses and learn hard lessons. The main goal is to keep the damage minimal and be better next time. Keep learning and trade wisely, right? A couple of our picks this week have flipped and now we need to look at how to manage ugly trades. The GDX calls and the PLTR puts are starting to bleed.  (hopefully you grabbed the win with META) While they may bounce back, it is a great time to look at effective escape plans.

The most important thing is to stay as objective as you can. Keith Harwood has a rule that echoes in my head every time I am in a bad trade. “Would I take this trade today?” If not, get out. If you don’t your probability of a bigger loss just skyrockets. Here are the top 3 things to remember when you are in a bad trade.

What Is You Hard Loss Limit?

You NEED to have a number before you enter any trade. Pick the number that works best. Is it a fixed dollar amount? A percentage? Totally up to you. But tattoo it backwards on your forehead so you see it every morning when you look in the mirror. Or just write it on something right next to your screen. Then, the harder part, don’t break that rule.

Trading rules are angels and devils. They will save you from disaster, they will cause the worst FOMO you have ever had and they will shame you relentlessly when you don’t follow them.

Take the GDX trade. It made a nice 15% move up the first day, then dropped 33% the next. If your loss limit is 15% you should be out right now. But if you talk yourself into breaking the rule and it drops more, it will feel worse than if you get out and it shoots back up. A small loss is always better than a big loss. If I am being honest, the right move would have been to take the 15% at the end of day one.

You Will Exit Trades That Could Have Made More Money

It is learning through repetition. A volume game. You will exit a trade with a small loss that rebounds right after you are out and shoots up higher. But it is about as certain as it can get that, if you trade for any length of time, exiting at your limit will help grow your bottom line. For every trade that miraculously swings back, there will be many more that will do their best to completely wipe you out. Just hold on to as much capital as you can and put it in the next trade. A 15% loss vs a 30% loss helps your profit as much as a 15% win.

Be Honest About What Went Wrong

Trade journals are by far the best way to build the system that works the absolute best for you. It is tough for many to have that discipline to track everything about a trade, but it is worth it. It is the most objective way to look back and see what went wrong. It is too easy to kid yourself when you analyze your trade. Look for the root cause of the mistake. Did you break a rule? Did you rush the trade and take one that didn’t meet all of your criteria? Be truthful.

When you are analyzing bad trades, remember you will have losses. If your trade met your criteria, if you followed all of your rules and it was still a loss, you may not have to change anything. As long as you planned your trade well, your system will tolerate losses. Shake it off and get back in there.

I’ll be sure to add a note on how the GDX and PLTR trades play out from here.

Oh, one more thing,

Keep learning and trade wisely,

John Boyer

Editor

Market Wealth Daily

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