Trading Habit #3 - Letting Small Losses Turn in to Big Losses
As mentioned in my earlier articles, trading stocks is a probability game. You will not be right all the time, which means that one of the most important aspects of trading stocks is to never let small losses grow in to big, portfolio debilitating losses. You have to limit losses at a risk level if you are going to be successful over the long run.
Psychologically you have to overcome the emotional attachment to one single trade. You have to realize that market is going to be there tomorrow and trading opportunities will be there tomorrow too.
You can play again tomorrow only if you have capital and the golden rule of trading is preservation of capital comes first.
Solution
The simplest and I think most effective solution for most people is to set a stop loss point before purchasing a stock, and apply it immediately after purchasing a stock. Use basic chart analysis to determine where the market will have proven your decision to enter a trade wrong, and set your stop just below that. Automated stop losses are best because they do not require you to have the discipline to pull the exit button. Do not change your stop once you are in the trade.
Also there are two things traders have to learn and it comes from experience.
- First one is possibility of taking a trade in opposite direction of your failed trade.
- Second one is if your stop-loss gets hit and then stocks starts to move back in the direction as you predicted earlier then reenter again.
the above two factors can help you see your loss in different perspective rather than just sitting on losses and hoping for turnaround.
Please do remember hoping, praying, wishing while you are in a trade is the best Indicator for exiting your trade.
Making the stop loss judgement before you enter the trade is best since you will not have an emotional attachment to the stock at that point since you have not put your money on the line yet.
I wish you best…
Suresh 
For those who have missed out on my earlier posts…