Editor’s note: We’re handing the reins over to Market Wizard Larry Benedict today…
He shares an important lesson he’s learned in his roughly 40 years as a trader – that often the most important thing is knowing when to let go of a trade and walk away before you blow up your account.
Clinging to a losing position is a surefire way to lose money… That’s why the most successful traders don’t cling to bad trades for fear of being wrong.
Read on below for more about it from Larry…
Ever argued with someone who refuses to admit they’re wrong?
It can have you tearing your hair out.
Faced with any number of facts, their instinct is to dig in even deeper.
But the truth is… We’ve all been that person at one point or another.
Especially if we trade in the markets…
Most of us stubbornly hold on to a position that’s losing money. Or we trade based on what we think the market should do – not what it’s doing.
I did this all the time when I started out in the markets nearly four decades ago.
And it cost me my trading account multiple times.
Only when I changed my attitude did I turn things around.
And that led to a 20-year winning streak that saw me ranked in the top 1% of hedge fund managers by Barron’s. Plus, Jack Schwager featured me in his book Hedge Fund Market Wizards.
So today, I want to share what changed…
Admit Defeat Early
One of the reasons I kept blowing up my account is I couldn’t admit I was wrong.
For example, if I believed the S&P 500 was going up that day, I would take out a long position and hold it.
Even if the position went against me, I would grit my teeth and wait for the market to turn.
But I was making a simple mistake. And it’s common among many novice traders…
I became wedded to my “view.”
I’d look for anything that would support my position and disregard countering data.
For example, if strong economic news came out, I’d see that as evidence of my long position being “right.”
That only made it more difficult if the market sold off after the news.
Thinking I was right and the market was wrong led to massive indecision.
And that meant small losses could snowball into something much larger.
Let the Market Decide
One way things turned around was when I began to set a predefined exit before I placed a trade.
A predefined exit just means I choose a percentage or price point where, if the trade hit it, I would exit my position – no matter what was happening in the market or economy.
It took the emotion out of taking losses. I let the market decide for me.
And I started going into every trade without any bias about what I thought the market should do.
If a strong long trade setup presented itself despite bearish news, I’d still take the long trade.
Similarly, if there was a strong bearish setup despite positive news, I’d take the short trade.
Doing this thousands of times taught me to ignore my own biases about the market.
It let me quickly accept when I was wrong, take my losses, and move on to the next trade.
So the next time you’re waiting for some big economic news to come out, set yourself a goal.
Ignore what you think the market should do with that news.
Instead, just focus on the price action.
That way, you’ll free up your mind to trade what’s in front of you.
And if the trade goes against you, let your predetermined stop loss determine your exit point so that you don’t have to wrestle with your emotions.
It’s not easy to admit when you’re wrong on anything – especially when money is involved.
But mastering this skill helped me turn things around and finally make it as a trader.
And if you apply these rules to your own trading, you can do the same.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict