Sunday, February 8, 2009

Learn from your Losses - Excerpted from 'Essentials of Trading - It's Not HOW You Think, It's What You Think' by Larry Pesavento and Leslie Jouflas, Traders Press.

When you lose - don’t lose the lesson! Great words from the Dalai Lama are just as appropriate on trading. Trading is a journey – not a destination. This journey requires that mistakes will be made. The really great traders are the ones that handle these mistakes efficiently and immediately. Roy L. Longstreet, the legendary soybean trader of the 1950’s and 60’s had a saying, “The first mistake teaches – the second mistake kills”. Learning from that first mistake is so very necessary but learning to not make the second mistake is absolutely crucial.

Here are some examples of the second mistake:

1. Placing a trade that doesn’t work is the first mistake – failing to use a stop is the second mistake.
2. You are under capitalized in trading, that is your first mistake – answering the margin call is your second mistake. Margin calls tell you many things. You are wrong in market direction and you are losing almost everyday.
3. You begin trading with no knowledge or trading plan that is your first mistake – the second mistake is that you continue t trade knowing fully that you do not know what you are doing.

Trading is a business with an easy entry. All you need is money to open your account. No one would buy a business with out first checking it out. Trading is an exception because the magnet is greed, the idea of “easy” money. How much can I make is what most people are thinking of when they enter the markets. If they thought “How much can I lose” the entrants into the markets would be far less!

No comments: