Whelp, that didn’t work. Tuesday evening I wrote a post titled, “Why I’m holding stocks ahead of the Fed’s rate-hike.” And 24 hours later, everyone knows that was the exact wrong move to make. But that’s the way trading goes sometimes.
If a person’s trading plan requires them to be right 100% of the time, they’re not going to last very long. The hard truth is successful trading means being wrong…a lot. If a person can’t handle that, they better find something else to do because trading isn’t for them.
In fact, the number one difference between successful traders and unsuccessful traders is how they handle being wrong. (Everyone has good ideas, it’s how they handle their bad ideas that drags most people down.)
Successful traders take their losses quickly and move on. Unsuccessful traders argue with the market and stick with their losers. As overly simple as this sounds, that really is all that separates good traders from everyone else.
Take my wrong trade on Wednesday. As I wrote Tuesday evening, I came into the Fed announcement holding stocks. But lucky for me, this was a new position and I always start trades with partial positions until they prove themselves. If I’m going to be wrong, it is a lot easier being wrong on a third or half position. And when I’m right, I keep adding partial positions until I’m fully invested.
And more than starting small, it is just as important to get in early. I picked up those positions Tuesday afternoon. By the time the Fed selloff started Wednesday afternoon, I was already sitting on a decent profit cushion, giving me a reasonable amount of protection. Sure, the index crashed 1% after the Fed’s announcement, but starting from +0.7% mitigates a big chunk of that sting.
And most importantly, when my trading thesis blew up moments after 2pm, I had no choice but to admit defeat and pull the plug. There was no giving it a few more minutes. If something is going to work, it is going to work. When the market took off in the wrong direction, it meant I was wrong and the only thing to do is get out and minimize the damage.
Sure, the market bounced hard an hour later, but I resisted the temptation to chase because the market wasn’t acting the way I expected, so it meant I was missing something. Rather than try to desperately salvage a bad trade, I simply let it go. And that proved to be a good decision because that bounce fizzled and there was a lot more selling left to do.
I was wrong on Wednesday. But more importantly, I lived to tell the story and I’m not going to let one trade discourage me. Like a city bus, the next trading opportunity will be along any minute.
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