I assume the worst from my trades, that they will always be unprofitable

For most of you that is probably the most asinine statement you’ve ever heard a trader make when it comes to managing trading losses.

Illustration of managing trading losses, assume loss on every trade

But it is true!

I don’t look at my next trade as one that I will make a lot of money from. Instead, I look at it from the vantage point, that I will lose a lot of money and what do I need to do to prevent that from happening.

Now granted, I don’t lose on all my trades, not even on most of them. This year, I have been profitable on 58% of my trades. That is an excellent rate, and one that I will look to maintain through the end of the year and beyond.

But having that kind of solid win-rate is only because I take the risk on my trades so serious, and that can only be done by assuming the trade will be a big, fat loser.

When you boil it down to just managing trading losses, my approach to swing trading is pretty much this:

  • Assume the worst possible outcome on my trade – and how will I trade in a way that keeps the loss as small as possible.
  • If I don’t lose, I consider myself fortunate, and raise the stop-loss accordingly.

In all honesty, you probably are not going to find a lot of traders who will approach trading with such a dire outlook.

I mean think about it, why do people get into the stock market?

They do so with the intention of making money and believing that they have what it takes to do just that.

As for me?

I know what kind of havoc I am capable of unleashing on my portfolio and what can go wrong, if I don’t treat every trade as if it will likely end up being a losing trade.

That allows me to zero in my focus on what matters most on a trade, and that is to MANAGE RISK.

The other reason why most traders will never embrace my “doom-and-gloom” approach to trading is because that is not what we were taught growing up.

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Everything was about positive reinforcement. Our parents were at the forefront of that and it is the right approach. I mean, unless you are Red Forman from That 70’s Show, any good-intention parent isn’t going to go around calling their kid a ‘dumbass’ all day long.

Instead we are taught things like:

“You can do it!”

“You can become anything you want to be.”

“Dream big things!”

“Never doubt yourself.”

It is these kinds of positive reinforcements that leads us to believe that because we want to be a good trader, that we should be a good trader, and as a result we will instantly become a successful trader in the stock market.

That is simply dangerous thinking in the stock market!

But when it comes to the right mindset in trading, we should more of the line of thinking:

“The biggest threat to my trading success, is myself.”

“I am fully capable of capitulating my portfolio if I am not careful.”

“Assume that you will always be wrong, and consider yourself lucky when you are not”.

These are horrible comments to say to others who are trying to succeed in the market, and for most people an awful thing to say in general, but the stock market, isn’t about playing nice. It is about making trading as difficult as possible for you, and if you don’t realize that, then you are completely at risk for destroying your portfolio’s capital.

In order not to do this, here are 3 tips to being a successful trader focused on managing trading losses

(which of course is the right side, when it comes to managing the trade right! ?)

#1 Avoid trading stocks within a week of their earnings report

This goes without saying, unless you have a verifiable edge when it comes to trading stocks, you should stay away from the earning reports. For long-term investors, it is different, you pretty much have to. But for swing-trading, you don’t, and as a result, you trade in between the reports.

Look, there are plenty of ways to profit in the stock market, and trying to predict this one-time event with any consistency is downright impossible. First you have to predict whether they will beat earnings and revenue, and even if you get that right, you have to hope that the company guides higher if you are long or lower if you are short.

Get either of these wrong, and you will see the market run against your position.

And that is what brings me to the next point about earnings – you have to predict the reaction correctly. Even if you predict the outcome of the earnings report correctly, you’re not guaranteed to predict the reaction to the earnings report correctly.

No one is geared to get all these things right – not even the big trading firms.

That is why I don’t even attempt to try to predict an earnings report, because if I am going to manage risk to the greatest degree possible, I can’t do that if I am waking up to earnings reports where the stock is 10-20% off, and as a result I am taking a massive hit to my portfolio.

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That kind of horrible price action will kill the risk/reward of your trading strategy, and when you are wrong, it takes a lot to make up that kind of loss.

#2 Avoid the ‘Crap Stocks’

The market poses enough of a challenge that you don’t need to make it harder on yourself by trading the stocks riddled with fraud and a total lack of profits in general. I basically don’t trade anything that is under $10/share. Sure there are some companies that I could justify trading below the $10 threshold, but when they trade that low, there is usually a very good reason for it, and just a broad rule-of-thumb, I just don’t even look at these stocks. I keep my focus instead on liquid stocks, whose companies are established and have been around for a while.

There are plenty of credible companies that will provide you with plenty of price action without having to delve into the world of penny stocks and companies on the verge of bankruptcy.

Beyond the problems that I just mentioned, the ability to manage risk on these penny stocks are nearly impossible, not to mention that most of them do not have much liquidity, so that even if you do use a stop-loss, there is no guarantee you will get a fill near the place that you got stopped out at.

Also, I would encourage you to ask yourself:

How many successful traders of penny stocks have you ever met personally, that were able to sustain their gains long-term, year-after-year?

My guess is that you won’t be able to name any – that is because they probably don’t exist.

The reason why I even bring up this point in an article of always assuming your trade will be a loser is that, more than anything else, when you trade stocks under $10, you are very rarely ever going to succeed. The odds are stacked against you.

I get that a lot of people like penny stocks because they get this feeling of having a substantial amount of shares when you can say you own $10,000 shares of a penny stock at $1/share, instead of 10 shares of Amazon at $1,000. However, you will make more money by trading the likes of Amazon (AMZN) and Google (GOOGL), long before you will ever break a profit trading penny stocks.

So while it is right to assume you will lose on every trade, and to manage the risk accordingly, it DOES NOT make sense to trade stocks that you are destined to lose at.

By assuming you are going to lose at a trade, it forces you to focus on the risk side of a trade, but that doesn’t mean you go where you have no chance at succeeding, because those are the circumstances that you cannot manage the risk properly with.

And Risk is the Great Discriminator! If you can’t manage risk on a specific trade or type of trade, you don’t trade it. Not being able to manage the position means you can’t succeed long-term, because it leaves you to the whims of the market and what the individual stocks will do, without leaving you with any recourse to actually manage trading losses or profits properly.

That brings me to my final point:

#3 When you assume you will lose, you will always honor your stop-losses.

Traders love stop-losses until they are triggered.

Look, I don’t enjoy it either when I get stopped out, but I always honor the stop-loss that I decide upon, before ever getting into a trade. If you don’t, you leave yourself to the feelings and the emotions related to the trade and that is no good, my friend!

Know the stop-loss before you ever get into the trade. When it hits, makes sure the stop-loss is in place for it to execute.

Don’t use mental stops either, because you will drag your feet in actually executing the trade, hoping that it will somehow bounce back, before you can put the order in. But more times than not, the stock will drift lower than you’d ever expect and thereby ruining your risk-reward.

Honor the stop losses. Know that regardless of what happens, there is another trade around the corner. If your trading strategy hinges on the success of one trade, it is a very bad trading strategy and doesn’t take into account the importance of managing trading losses. 

Trading success if the accumulation of many successfully, managed trades both winning trades and losing trades.

Always focus on the the downside, and what the stock can do if it runs against you. Don’t occupy your thoughts with wild fantasies (you know who you are!) about how much money you’ll make if the stock goes up to some fantasy number that you have in mind.

Do these things that I have outlined, and you put yourself in the position of assuming that your trades will be losers, treat them as such, and then you will experience trades that are consistently winners.

Sounds contrary to reasonable thinking, I know, but consuming yourself with the downside risk is what matters most in the stock market and it is the only thing that matters after you get in the trade.


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