Many unfamiliar with trading, think it is gambling, or that we will lose all our capital on one trade. These folks don’t understand the basic principle of a stop loss. Rather than hold a stock from $100 to $0, a good trader will be out the moment that price confirms that they were wrong. For a day trader, this may be at $99.50, and for a swing trader it may be $97. Only a rookie trader would hold through $95-$94-$93—-it will come back—-$89—-$86-$85—-waiting and hoping, it can’t go lower—-$81-$80-$79—-this is ridiculous-$76-$75-$74—-these other traders are idiots—-$71-$69—I give up! Sold at $68.50—-whew! That was a nightmare! Wait…$70–$72–$75…I give up!!!
The key to trading is to not make your trading symmetrical; you should not have equal profit targets along with the same level as your stop. You should not be buying a stock at $100, and your profit target be $103, with your stop at $97. This is symmetrical because it has the same dollar target on both sides of your trade. This means you have to win over half the time, and offset the bid/ask spread and commissions. This is difficult for most traders, and a string of ten losses can be devastating to your account if you don’t have winning trades to offset them.
Their trading may look like this trading one hundred shares:
+$300
-$300
+$300
-$300
+$300
-$300
+$300
-$300
-$300
Total losses -$300
Your trading shouldn’t have negative symmetry, either. You should avoid letting a loss run in hopes that it will come back. This is a formula for disaster, with one big losing trend after another until you are wiped out.
Their trading may look like this trading one hundred shares:
+$200
+$200
-$1000
+$200
+$200
+$200
-$1000
+$200
+$200
Total losses -$600
What great traders do is have positive asymmetry. They have no price targets, and they will let a winner run as far as it will go, only exiting after it stops going up and reverses its trend. They will buy a hot growth stock at $100 and when it runs to $130 into earnings, they just let it go. However, if they buy at $100, they may also stop it out immediately if it falls to $97, because it shows them they were wrong about the trend. They have winners that are bigger than their losers. Two big winners out of twelve trades make them very profitable.
Their trading may look like this trading one hundred shares:
-$300
-$300
+$3000
-$300
-$300
-$300
+$2000
-$300
-$300
Total profits +$2,900
Great traders have an edge; they create positive asymmetry in their trading, and end up with a very profitable long term strategy.