After going through the process of developing a stock trading strategy that works and suits your lifestyle, you’ll have to train yourself to follow your trading plan without losing sight of what you’ve already determined to work.
Following and sticking to the original trading plan is a tough obstacle to overcome for many, but a necessity in most cases. Ideally, a trading plan will have an entry and an exit strategy to help manage positions, lock in profits AND minimize losses.
As an example, if your stock trading strategy produces three winning, profitable trades once you begin to put it to use, what happens when the next trade is a loser? A losing trade can take hold of one’s emotions and cause one to “hope” that things will turn around.
The next thing you know, the losing trade becomes an even larger losing trade and you’re still holding on to the position. “But the stock is so cheap now that it can’t really go much lower”. Sound familiar? What happened to the exit strategy to help minimize losses?
Worse yet, what happens if the first trade you enter with a new trading strategy becomes a losing position right from the start? Do you hold on to it forever, waiting for it to become profitable? What happens if you do hold and the company goes bankrupt?
Psychologically, people have a real tough time selling, or closing out a position, when they’re losing money. Conversely, people also have a tough time selling and closing out a position when they have an un-realized profit because they think they were right, and say “why should I sell if I am right and making money?”
These are the exact reasons why developing a stock trading strategy with a plan that has rules and guidelines for when to buy AND when to sell.
For those who realize this and actually have a trading plan in place, the next, and probably most important thing, is to stick to what you have already decided to do and follow your plan without second guessing yourself.
In the long run, you’ll realize and be much better off taking the losing trades by following your rules then letting your emotions take control. In fact, I once read that you should actually pat yourself on the back for closing out a position that is a loser, as long as you followed your guidelines.
If you treat losing trades as a positive like this AND the winning trades as the obvious positive they are, your life as a trader will be much more manageable over the long term.