We all know that doubling up on losers and taking profits too early on winners are bad habits. But it's very hard to overcome this kind of impulse trading.

One way I've found that helps me psychologically is to look at the portfolio performance of my open positions everyday. I love seeing open profits, hate seeing open losses. When seeing most of my positions in the red, it would always gnaw on me, yet I just couldn't bring myself to sell (or cover in the case of short position), hoping that the losers would come back at least to break-even.

But one time when I was fortunate enough to have a few winners (not my own ideas, but still they were my trades of course), I decided to try aggressively selling losers and adding to winners. And I found it to be psychologically rewarding. All of a sudden my portfolio was showing more green than red and the net portfolio value started rising instead of falling. Having the losers out of sight and out of mind really reduced the stress.

Not to say that I would recommend doing this in a haphazard way. Always have a stop when you open a trade, whether hard or mental. Then move the stop to break-even as soon as you have a decent gain, to prevent a winner from becoming a loser. Never risk too much on one trade, etc., etc.

Another technique I've found helpful for a position that is only a slight loser is to write a near-month covered call. That way I have a little downside protection and can turn a loser into a winner without taking the excess risk of doubling up. Of course one still has to be disciplined enough to liquidate the combined position if the loss starts accelerating.

I still have a lot of obstacles to overcome in my trading. For some reason, I find it much easier to be disciplined with individual stocks compared with indices. The constant chop and noise in the indices always seems to shake me out at the wrong time.

Anyway, just thought I'd share this in case it might be helpful to others like myself who are still struggling with trading discipline. Sorry if this stuff is too basic for the pros here.

TechSkeptic

Hi Tech

Writing covered calls is one of the more conservative and most rewarding of trading vehicles in the markets, and really why options were developed to begin with.

In fact, I always find it fascinating that most brokers, financial sites (market letters) - or message boards for that matter - rarely talk about this as a way to generate a consistent income on a longer term holding as it's really hard to beat the consistency and protection one gets from utilizing such a strategy - especially with stocks that have low volatility.

As far as your other items in which you refer to in this post - stock picking is always a challenge whether you're a technician or a fundamentalist.

But the real challenge in all of this is understanding that this is a battle between you and the market. You can be right about the direction of a price move, but either you're timing maybe wrong OR there just isn't enough traders out there that agree with your observations.

And, of course, we all have this inherent need to be right about the things we say and do in life - and why it's so hard to sell something in which was initially to be a successful venture .

So though it's hard to sell a loser when the time comes around to do so, it's also important to remember that if you do sell with a small loss you will be able to come back again at a later date...something of which is hard to do if you have nothing to come back with when another opportunity presents itself later on.

In a word it's called "discipline" and the ability to know that you're only as good as your last trade.

Thanks for sharing your thoughts.

Fib

tech,

You know, we all see a deluge of arguments, perceptions and predictions on what the market is going to do every day and yet it's relatively rare for anyone to come out and discuss their personal struggles with what is arguably the most difficult aspect of trading/investing - psychology and discipline. As far as I'm concerned the trading/investing process itself is actually a fairly simple endeavor. What I mean is that it's not complicated. Basically your either long or short and the market either moves in your favor or it doesn't. But as simple as it is- it is not easy. The hard part is mastering the emotions of fear and gread that effect us all. I for one am constantly struggling with not letting a trade develope to it's full potential for fear that I'll give up too much of my profit, and yet risking a portion of your profit is absolutely necessary to maximizeing your profits.
It's refreshing to see that there are realistic serious traders out there that recognize that there is much more to successful trading than just being right or wrong.

I really enjoy when we talk about trading psychology on this forum , and share market wisdom.
Actually when i read the first post in this very thread about cutting losers and letting profits run i read about something everyone of us has felt ,is feeling and will be feeling ..
Nice job guys!

After trading for a living for the past three years I've learned that there has to be some conviction in what your doing. Somethimes this might be contary to traditional trading practices. There are times when adding to a lossing position makes sense but you have to have a mechanical process to take you out if your wrong so your ego dosn't get you in even deeper.

great thread folks,

I too have had to become much more disciplined in my trading. Unlike many of you, I'm a momentum investor and while I love the charts, mostly a fundamentalist.

Where I've had to really change is with my Exit Strategy - establishing it, and following it without fail. Sure, it's resulted in a few trips to whipsaw city, but so be it. I'd rather follow it and not have to worry about riding my gains back down.

Whether I'm playing a sector with funds or a specific stock, I've got my mental stop loss in place and obey it to the letter.

One thing that has changed with me that makes this easier, is earlier in my career as an investor, I still have a core portfolio of passive investments and played with my mad money. This resulted in a LOT of stuff to watch.

Now I limit my speculations to a very few horses with larger bets and watch them very closely. With fewer horses to watch, it's easier to obey exit strategies and to keep track of exactly what's happening with my plays.

take care,

rono

One of the best books I have read on the subject is Daryl Guppy, Better Stock Trading. It's all about money and risk management. His golden rule, never let a loser exceed 2% of your total trading capital. Actully I am more conservative; I usually buy in 1k lots and never let a loss exceed $1/share - with one exception and that is gold mining stocks. When they go down, as now, I "load my guns" with 1000s of shares of seniors, buying eadch 1k at a lower price, but not so much as to worry about a margin call, and then I wait. When the POG gets up around $390, and the mining stocks are roaring, I sell into strength, and wait for the next dip.