Being Right & Yet Still Losing Money - The Psychology of Trading
Posted on February 18, 2011
Sometimes you can be right about a stock and still lose money, so how unfair is that! Have you ever been in a stock where you have done all your market analysis and traded your plan only to be stopped out by the smallest of margin? You then see it make new highs and substantial gains whilst you're left on the sidelines with a loss!
If you answered no to that question you're probably kidding yourself! I think every trader has been in this position at least once (with some more often than they would like to admit) This is a common occurrence for a trader but how you deal with it is what separates the successful traders from the failing ones.
When we first started out as traders I remember the trades we took when particular stocks just had to make a new low stopping us out inside a flag before making record new highs! I always felt like the market knew where we had placed our stop and it was against me. Our education, determination and willingness to spend hours studying market movements soon started to open our eyes to market cycles and repeatable patterns that we could identify as opportunities in the stock market.
The reason for the small insight into the double dip stoploss story above is not only about the stock market education but it's also about your mindset and Trading Psychology . The rules for our entry on that particular stock had a money management profile which we were comfortable in risking and yes the particular stock eventually went up and made new highs after stopping us out. But if it had continued down we could have potentially lost a lot more money.
Having this particular mindset when trading will allow you to come to terms with being right but not being profitable. This is one of the hardest mental challenges a trader has to overcome. This is why we use a 1:1, at the very least, risk to reward profile therefore never risking more than you can ever possibly achieve in profit. Anything above 1:1 risk to reward will allow you to be wrong more times that you're right which can help when you're new to trading. You just need to know how to identify these areas!
Stock Market Educations Video
Market update
The market is still making new highs and is sticking to the top of the trading channel. For us, this condition is a very low odds trading area and we use it only for smaller position and smaller target trades so that we can wait for a better correction to get some higher odds trades on.
SLV/Silver broke out yesterday and is showing relative strength against the market .
GLD/Gold only moved 1/3 of what Silver moved in percentage terms. This is what the relative strength is telling you.
FOSL is one of the stocks we are following which has a very nice uptrend and has a nice continuation pattern.
VLO is still climbing and Philip points out the trend line and channel where the price action is being contained. He also points out the possible trade execution areas on the chart.
If you have any questions relating to this market update or wish for us to talk about a trading subject that you're interested in, please don't hesitate to contact us.