Thursday, January 28, 2010

Finding Opportunity in Loss: A Hallmark of Great Trading

Let's say I think stocks will break to the upside and I take a long position. The market goes my way initially, but then reverses. What looks like a valid breakout now shows itself to be a false breakout. I stop out of the position and take a modest loss.

That is good trading.

One trader I recently talked with took exactly those actions--and one more. He saw that the breakout was false, stopped out of his position, and took a modest loss. But he had mentally rehearsed what he would do under just such a scenario. He had told himself that if this long trade didn't work out, the market could retrace the entire prior day's range.

So he stopped out, took his loss, and flipped his position to be short.

He made money on the day.

That is great trading.

The losing trade set him up for a winning day, and all because he was prepared to act on opportunity, not just prepared to limit risk.