Avoiding Wipe-outs

Source: http://www.thecrosshairstrader.com/2010/07/how-stock-traders-can-avoid-a-wipe-out/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TheCrossHairsTrader+(The+Cross+Hairs+Trader)

1.  Never trade through earnings.  I view this as moving from calculated speculation (i.e. a good set of rules to trade by) to pure gambling.  There is no reason to speculate on whether or not there will be a huge move and you end up on the right side of it.  What if you are wrong and end up being WAY WRONG?  There are just too many opportunities between earnings reports to think we have to trade through them.

2.  Never trade with more money than you can afford to lose.  This is a foundational principle followed by all good traders.  If trader A has a $100,000 account and puts on a $5000.00 position and trader B has a $100,000 account and puts on a $50,000 position who do you think is going to sweat, pray, and hope more for his trade to work?  Who has the most potential to blow up his account and adversely affect his ability to trade again?  Who is putting himself beyond the possibility of ultimate defeat?

3.  Never add to a losing trade to “save face.” Kirk’s example of a trader who has to win is a prime example of a trader who is primed to lose. I have said this here over and over again and I will say it again:  we trade to make money not to be right.  Making money has to do with letting the ego go on vacation and the money go to work, not vice versa.

4.  Never trade the the sure thing. There are no sure things in the stock market except that the market will surely be open another day.  The latest discussions on Wall Street about the death cross is just the sort of sure thing that traps the most traders on the wrong side of the trade and leads to the best fast moves from false moves.  Mark my word we will see it again.

5.  Never trade because someone else says so. Crosshairs members will be the first to tell you I always ere on the side of caution and never say buy this or that.  No one person on the Street has the inside scoop on where the market or a particular stock is going.  If someone does he is not going to tell you for fear of the SEC.  If we always keep in mind the coin approach to trading (there are two sides to every trade)then we will never fall for what someone else says.  Instead we will base our trading on what is appropriate for our own situation, psychology, available funds, rules, etc.  If our own analysis agrees or disagrees with another so be it.  A two headed coin has few sisters.