Friday, November 5, 2010

A trader's job

I was asked by an acquaintance about why I focus to much on losses - which is entirely not true; I focus more on controlling losses rather than the losing itself - the idea which seems to confuse her. So I explained. Well, I tried. I told her that the money you put into the stock market is a losing money, the money you can afford to lose.

Every time you put money into the stock market, you should be expecting it to lose, until proven otherwise by the market. To assume you are right every time you enter a position would only result into expensive loses, as you are going to marry your own opinion. And most of the time, people hate it when their opinion is wrong so they hold on to losing trades instead just to prove they are right. Then the stock starts to recover, they start to feel good because now, they are right. The stock has moved significantly against them though. Or they then realize way later on that they are indeed wrong in their position. Either way, they have already incurred major damage.

Why focus much on losses? What do you think of a trader's job, I asked, answering a question with a question (lol).

I believe that a trader's job is to cut losses. If you let losers hang on, the more damage they do until you finally accept you're wrong. You decide how much you are willing to give the market -stop loss and trailing stop- BEFORE you enter a trade, not when you're in it.

It becomes wrong - looking at the possible loss; fear - alone. We should be looking for the possible upside too so we can compare the potential risk-reward of the trade, then we decide if the trade is worth trading.

Not lecturing or feeling like a guru or something, just picking my brain here. I could be wrong.

So what's a trader's job anyway?

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