The Worst Thing a Trader Can Do

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Can you describe your trading style? Take a moment to think about this. It may not be as easy as it first seems. You see, your trading style defines what sort of trader you are. It also has a big influence on your chances of success. Yet many people have little idea what it’s all about.

Now, don’t worry if you aren’t sure about your style. That’s what these videos are designed to help you with. I want you to use them as a guide to becoming a better trader.

One of the most important elements of my trading style is to cut losses. No matter how much I like a trade’s potential, there comes a point when the best option is to accept defeat. But many traders struggle to do this. Rather than cut a losing trade, they choose to soldier on.

Have a read of this:

“Jason, I struggle to close trades. When it hits the stop loss I hesitate and try to wait for the price to go back up. Sometimes the price bounces and I miss out, but other times it keeps going against me. I feel as though, as soon as I close my trade, it will start going back up. Do you have any suggestions on how I can improve closing my trades?”

Member, Darryn

Darryn’s situation is far from unique. I’ve seen many first time traders and professionals struggle with this problem. I also remember times when I’ve held on too long myself. You see, clicking the button to sell can be hard. It locks in a loss and shuts the door on a possible recovery. The thought of giving a losing trade a “little bit longer” is often appealing.

But the consequence of fighting on can be disastrous. Rather than accepting a relatively small defeat, some traders “dig in”. The risk of doing this is a complete wipe out. And if you lose all your capital, you can’t trade — the war is lost.

I’m going to show you two trades from my portfolio. They highlight what could happen if you compromise your trading style by not selling when you should. Maybe you’ve experienced similar situations yourself.

Check this out:

This is the type of situation Darryn fears — selling at the low. I bought a stake in Nearmap as the share price was breaking upwards. I then rode a strong trend for nearly eight months. Now, have a close look at the chart… you’ll see a red dotted line below the share price. This tracks the progress of my trailing stop. I sell when the shares touch the line.

Now here’s the frustrating bit, Nearmap hit its exit stop just three days before the shares made a lasting low. Nearmap might still be in the portfolio if I’d held on just a little bit longer. But of course, I only know this in hindsight. What if I held and the shares didn’t rebound?

Have a look at this:

People often worry about the recovery they might miss. But what they should be worrying about is how far a stock could fall. This chart above shows another real-life trade from my portfolio. It was in a Western Australian mineral sands miner called Dorey Minerals.

Now, this trade got off to a good start… my shares rose 97% in the first six months. But the run didn’t continue. Dorey turned and began falling. I sold as soon as the shares hit my trailing stop.

Now, here’s the thing… many traders are reluctant to sell a faltering stock. Maybe it’s because they don’t want to lock in a loss, or perhaps they hope a stock like Dorey will rally back to a previous high.

But this is often a huge mistake. The longer you delay selling, the harder it can become. I often hear of people riding a stock all the way to zero. They cling to the hope that a recovery is around the corner.

Sure, some people will say I made a mistake selling NEA. But these people miss the point… the danger isn’t with the stocks that rebound after you exit… it’s with the ones that keep falling when you don’t exit. Not selling the likes of Dorey could completely ruin your portfolio.

So that’s all for this week. If you liked this video, or even if you didn’t, scroll down and leave me a comment, or maybe a thumbs up. Also, if you’re watching this anywhere other than my website motiontrader.com.au then head over and have a look.

So until next time, I’m Jason McIntosh, and let’s find some trends this week.