It’s easy to buy stocks and open a trade. The problem that most traders face is knowing when to close those trades, which is what separates the winners and losers of the market. Here are some nuggets of truth that could help your mindset around closing trades:
The ability to close trades depends on having a sound risk management system. Not all trades are alike and some require different degrees of profit taking, but knowing when to close a losing trade should always be based on a stop loss. Whether you’re taking profit or cutting your losses, your decision to enter and exit trades should be based on risk and reward.
It doesn’t matter if I believe it’s a good trade! It matters if I’m in agreement with the majority of people (including institutions) and they too believe it’s a good trade. If I’m long on a stock whose primary trend is forming lower highs, then I’m very likely on the wrong side of the fence on that trade. It’s either happening or it isn’t, and fortunately the market can be very clear about its intention. The market is unemotional and it doesn’t care about anyone’s wants and needs. Play the chart, not your emotions.
Do not average down losing trades! The market is replete with stocks that are trending up and stocks that are primed to make its move. There is no need to tie up your capital on losing trades (note that I didn’t say losing stocks). Focus your capital on the stocks that immediately require your attention.
Don’t get trapped in the cycle of lower lows and get stuck in its psychological pitfalls. Your time and money deserves better than to have it stuck in a losing trade. Maximize your profits and cut your losses short. Your trades should always be working hard to build your net worth.