Investing is something that most people will do in some way during the course of their life. Stock market trading is one of the more common methods of investing. What new investors often find difficult when investing in the stock market is the idea of loss. Losing money on a trade can be a scary proposition. It can frighten traders to the point that they won’t make a trade for fear of them being wrong. When a trade is properly executed however, being wrong isn’t necessarily a bad thing as long as you are being wrong in the right way.
So what exactly is the right way to make a wrong trade? There are four things you should always do before making a trade:
- · Research the company and any upcoming and past news items concerning the company
- · Decide on an entry point
- · Decide on a profit target
- · Designate a stop loss
If those four criteria were met and you entered into a trade using proper leverage relative to your account and the trade was within your overall strategy, then regardless of the outcome of the trade it can be considered a correct trade. Notice the difference between correct and profitable. If this trade ends up being unprofitable you will exit the trade via your stop loss and have gained valuable knowledge along the way. This is an example of losing the right way.
Losing the wrong way is when you make any number of reckless decisions that cause you to differ from your trading strategy. These could include but aren’t limited to lowering your stop loss in hopes the trade corrects itself, getting greedy and not taking profits when a trade hits your profit target, or diving into a trade without proper research. If you make an erroneous decision like those and enter into a losing trade, the problem is compounded because not only have you lost money but now you have also left your trading strategy behind and will now be questioning your psychology as a trader. This is not helpful to learning and growing as a trader and will not help you to be more profitable in the future.