Knowing When To Take A Loss

Knowing When To Take A Loss
Knowing When To Take A Loss
Knowing When To Take A Loss Getty Images

You’ve done your homework. You have a trading strategy that has been behaving consistently for the past few weeks. All of your indicators are pointing to a beautiful trade setup. You enter the trade, and everything looks like a slam dunk. The market is moving where you expected it to go, and you kick back and relax knowing you are going to cash in on the trade.

Then, in an instant, the market starts to reverse and move against you. You start to rationalize that this is probably just a brief retracement, but it keeps moving against you. You start wondering, “How can this be?”.  You executed your trade exactly according to your rules. There’s no way this trade can lose.

Staying in a losing trade is a costly mistake that many traders make, especially for those who are new to trading. With binary options, losses can really be painful, especially if you are placing an in-the-money (ITM) trade, where you are risking $70 or greater per contract. When you place an ITM trade with binary options, your are trading with the probabilities on your side.

If Crude Oil is trading at 45.50 and you are convinced it will sell off at 2:30pm EDT when the market closes, you could place an ITM binary option at around 45.70, possibly risking $70 to make $30 at expiration. If it’s 2:00, and the market starts moving toward your 45.70 strike price, it may be time to re-assess the trade. Why is the market reversing? Is it speculation? Geopolitical news? Unknown factors?

Once the market moves through your 45.70 strike price, you may be staring down a $35 loss or greater on your $70 risked. Do you stay in the trade, or is it time to bail? Knowing when to get out of losing trades is a key to preserving your account balance.

Losing is part of trading, and hoping a trade turns around in your favor can cost you money. Taking a full $70 loss per contract is far more painful than escaping with a $35 loss. You live to trade another day.

Losing trades are painful, but they also provide learning opportunities. Here are a few things to consider:

  1. Take a screenshot of the trade, document it, and journal it in a daily trading log.
  2. Did you follow the rules of your trading strategy exactly, or did you deviate from your trading rules?
  3. Was it a high-quality trade setup, or were you trying to force a lesser-quality trade?
  4. Was this a time-tested strategy that failed today?

Analyzing your losing trades is a great way to learn. If you don’t document your losses or forget about them, then you are possibly leaving yourself open to repeating the same mistakes.

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