Today we will start discussion on widespread misconception that are floating around the trading community and gets lodged into traders minds. I have been talking to many traders every week, during our talks these misconception will finally come up. A lot of these are inaccurate and ineffective ideas,which lead traders into a cycle of bad trading habit and causes them to lose hard earned money in the markets to professional traders.
Lets discuses the one of most erroneous trading belief many trader posses and hopefully after reading the lesson will be able to think differently.
1. Let your Winners run and Cut your losses.
We hear, read old adage “Ride on Winners and cut down your losses” . The same can be found on any trading book/website you come across. But this is very subjective term and need further analysis on What this means and How a trader can implement the same.
Majority traders will exit in small profits and run on their losers, If you do not agree share your experience in comment section below.
Very few try to let their winner run as much as possible but the end results is that they actually make less money over the time. What could be the reason?
Answer lies in our trading mindset and trading psychology. Let me elaborate on it ?
When a trader get into the mindset of setting up huge profit target for every trade he takes, trader will end up in never taking profit forget about taking small profit. Well it might sound absurd but its true psychologically its harder to close a trade when its moving in your favor than when it comes crashing down against you.Majority of traders are trading emotionally and with very bad money management and no trading plan, contingency plan end up waiting to take profits until trades moves against them and back to entry level.
Remember last time you took trade in Nifty at 7000 hoping of selling it at 7300 only and when trade went to 7100 you felt elated but your mindset was 7300 only and ultimately gave up all your profits and ended up in loss. Typically majority of trades are unable to cash on profits when they are up with lot of money,2016 crash in Jan and Feb most of traders were up 100-200% still they did not took profits as the feeling of warn and fussiness will wipe off.Only when market starts retracing they will end of exit at small profit or losses in most of cases losses. Many Traders who were short from 7200 for a target of 6600 are running for cover now.
Why a profitable trade end up being a loss as described above, reasons can be:
- Very High expectation
- Psychologically when a trade is in profit a trader is on top of the world and their is a feeling of elation, You are on Top of the world and its very difficult for most of people to make conscious decision to take their profit and cut off the feeling of elation.
This is why I am a big fan of simply taking a 1:2 or 1:3 risk reward profit on most of my trades; it often allows me to exit when the market is in my favor rather than when it’s crashing back against me. I always have a plan of action on how I will manage my exit before I enter the trade.
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