Tonight’s subject is going to be about ‘Control’. The main reason to address this topic is derived from the fact the great majority of emails I get are tightly related to that issue. The number one problem out there is usually one of the following:
- Being ‘stuck’ with a position
- A position showing huge and devastating losses
- A single position that is way too big
The underlying problem is always the same. At some point in time things changed and control shifted. You started out being in control and then the stock you own started to control you. The position then went on to devastate your financial capital and ultimately devastated your mental capital.
Again, the root cause is always ‘Control’. To be more precise: The loss of control. Here’s what you should do in order to avoid losing control:
- No game plan if the stock moves to the downside.
- SOLUTION: Use stop losses. Develop a habit of entering your stop loss immediately after opening a new position.
- Rationalizing losses and making excuses.
- SOLUTION: Your stop loss will take care of any rationalizing.
- Believing in a company, management, your analysis, fundamentals etc.
- SOLUTION: Your stop loss will protect you from black swan events, things you don’t know or couldn’t foresee etc.
See what the different solutions have in common? You got it. A stop loss. It is not influenced by emotions and rationalization and takes you out of a position if a stock reaches a predefined price level.
To make a long story short: You should do everything you can in order to regain control and then stay in control. If your position is in control of you, do whatever it takes in order to get back in control. Sell. Yes, that’s exactly what I said: Sell. Go to cash. Free your mind and stop rationalizing a losing position. Take a break. Regroup. Rebuild your mental capital. Then come back and stick to a disciplined way of trading. Use stop losses and stay in control. As Dennis Gartman says: Every single disaster is due to traders not cutting their losses and letting them grow into huge losses. Cut your losses. Cut your losses. Cut your losses.
Always ask yourself who is in control. If a stock you own is controlling your every thought you have a problem. Sell as much as you need to in order to get back in control. Then STAY in control.
More on how to best avoid disaster:
- Thoughts on Stop Losses
- How to combine a technical and fundamental approach
- Mental trading issues
- How to correct trading mistakes
If you are driven by the fear of missing out you are doomed. – Anton
- Some Thoughts On Using Stop Losses
- Why Trading Meaningful Position Sizes Will Make You A Better Trader
- Went To 100% Cash
- Explaining The Rationale Of My GERN – GERON Position
- Timeless Trading Wisdom – How To Correct Common Trading Mistakes
- Linda Bradford Raschke – 50 Time Tested Classic Stock Trading Rules