Selling Stocks Short; September 23, 2007

Selling Stock Short September 23, 2007

Inning 6

Last inning, we looked at the problem of getting out of a trade too early. Today, we’ll look at the other side of the equation – letting your losses grow.

We’ve all been guilty of getting out of a trade too early. That’s only painful.

What’s worse is staying in a trade that is going against you and costing you money.

Every investor out there has been guilty of this at least once. Your trading capital is your most precious asset. If you lose it, you’re done. You can have the greatest system, but if you’re broke, you’re done, caput – finito.

In baseball, you can’t get a hit if you’re not in the game.

You avoid this trap by making sure that you have the ability to stay in the game.

Making a trade is making a business decision. The upside is a profitable trade. The downside is a losing one.

Before you ever place a trade, you need to know what you’re exact risk in the trade is. If you don’t, you’re a fool.

That’s first and foremost. If this trade doesn’t work out, what’s my pain going to be?

The other thing that I consider is my time frame. How long am I willing to keep this trade on the books if it’s not working and I haven’t been stopped out yet? There’s nothing worse than dead money.

When you place a trade, decide in advance how long you’re going to keep the trade on the ledger. It’s easy if it’s profitable. What do you do if it just sits there and does nothing?

I like to look at each trade on a monthly basis with a fresh set of eyes. If I was going into this trade today, what would I do? If my answer doesn’t coincide with the trade, I close it out and take my lumps.

Yesterday, we let our profits run and today, we put a floor on our losses.

That’s about it for now.

RAC
The Stock Trading Advisor