If you can sell a Bad Entry trade, DO IT! Don’t think about how much you could have made!

This post is about a general trading error, nothing to do with the Russell 2000, but keeping in line with the theme of my rule here, I’ll use TWM (a 2x Russell 2000 inverse)  to demonstrate what I’m talking about.

Scenario:

You get yourself into a horrible entry trade, which then promptly moves against you. Most likely you were chasing, hoping to ride the momentum. But the stock (or ETF) reverses, and you don’t bail out. Instead you watch it reverse, going lower, and lower, all the time thinking “I should have waited until now to buy it!”. Then the next day, a lucky break! That stock pops back up to where you bought it! However, instead of feeling lucky, you are obsessing about how much you “could have made”, had you just had a better entry, the previous day. So, rather than seeing the true p&l on that trade, you are seeing how much more it has to move, for you to make what you feel you “should” have made from a better entry, yesterday.

Then the stock pulls back, to where you are flat. You don’t bail – no, you still have a lot more coin you feel you need to make… Then it drops down… You hold it, watching it go reder and reder… Then finally you sell, taking a loss, not believing how stupid you were.
More often than not, you then watch it turn back up, and you stop looking at the screen, lest some piece of electronics goes out the window…

Here is this scenario, using TMA over the past 2 sessions:

Does this sound familiar? I bet it does.. It does to me. It’s happened to me many times over, most of the time after trying to chase a position.

This is a rule that I’ve developed for myself, to help me get out of such situations with a min of financial and emotional damage:
If Mr. Market gives you an opportunity to get out of a trade which you now recognize was a bad one, at break even, or even better, a small profit. TAKE IT!!!!!!!!!!! Do NOT (!!!!!) let thoughts of lost profit opportunities, or past day’s (or even hours’) action cloud your thinking – sell it. Period. Just do it, don’t think about it.

THEN, having removed the position from your balance and your mind, look at that stock again, objectively, taking into considering only the relevant price action. And ask yourself – outside of any other considerations (regret, frustration, etc), would I be buying this stock here and now. If the answer is yes, by all means, buy it back. If the answer is no, then don’t buy it.

Now, I know. I can see a lot of you thinking “but I don’t need to sell the stock, I can do that analysis in my head while it’ still on my books.” Guess what? If you could, you’d never yourself in this situation. Do no underestimate the impact that the very presence of a position has on your mental attitude about that stock, and what you see in the price action. This is a concept talked about in “Trading In The Zone”, an awesome book – if you have a position, it is normal for your mind to filter out “painful” information, which means your mind will give much greater weight to the ticks which “agree” with your position, and will cause you to (try and) disregard information which suggests you are “wrong” in holding that position.

If you unload that position, you no longer have to worry about that filter getting in your way – it will be much easier to OBJECTIVALY evaluate the price action, and decide if you should buy the position back…

Well, this isn’t the ultimate truth of the universe, but it is something which I’d argue over a beer…

Have a great weekend, everyone, and let’s have some great trading next week!! I picked up 200 shares of GS into the close, let’s see how that’ll treat me next week… Everything else is cash in my account.

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