The Lesson You Must Learn As A Trader

How often do you reckon a successful trader gets it right? 60%, 70%, of the time?

Not a chance!

Most traders don't get anything near that sort of hit rate. At least not the traders I talk to. Many of the best traders have a hit rate of well under 50%.

But they still make money overall.

This all comes down to what's probably the most important lesson you can learn as a trader. That is: maximise your winners and minimise your losers.

Even if you don't consider yourself a trader, keep reading. This is for long-term investors, too. In my experience, many trading concepts can be incredibly useful for your long-term investment approach.

Imagine you're learning to ski. You're descending nervously down the slope when things start to go wrong. You're building up speed and you're going too fast to put in a turn. That's when most sensible novices sit down - a self-induced fall you might call it. If not, you end up gathering pace and setting yourself up for an almighty wipe-out.

That's kind of what I'm talking about here. When your losses start to gather pace, you need to get out of the trade. A calculated crash - and minimised loss - means you can get up and have another go.

In terms of trading, what we're talking about is setting relatively tight stop-losses. A stop-loss is basically an instruction with your stockbroker to quit your trade if it hits a predetermined level. It quite literally 'stops' your loss from escalating.

Now clearly such a tight trading capital preservation strategy could trigger a lot of stop-losses. As a successful trader, you're going to have to accept not just the occasional loss, but a lot of them.

That's why most investors don't make for good traders. Most can't accept that in this game you never progress further than the beginner's' level. The most common shortcoming for a trader is that he thinks he's an expert. He's not going to sit down before he falls down - and he sets himself up for a serious wipe-out.

But of course you're never going to get rich by just cashing in losses.

Why it is important to let your winners run

To make up for your losing trades, you're going to have to make sure you squeeze some serious profits out of your winners. This is tougher than it sounds.

With a stock moving up, emotions run high. There's a very real danger of getting trigger happy... glued to your monitor, with your hand on the mouse, it's all too easy to snatch a quick profit. "You'll never go broke cashing in a profit" is dangerous advice.

What you want to do is make the most of the momentum. Ride your winning trades until you're confident the trend has reached the end. A trailing stop-loss could be great way of doing that. You keep moving your stop-loss up as the price goes up, selling once the stock drops a certain amount below its high.

The point is, minimise your losses and let your winners run