Start at Stop: Form a Plan
“The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time. When a stock moves below a mental-stop, sell it immediately.”
You're probably here because you want to make money in the stock market. You might be someone who is new to trading, someone who's been trading for a while and wants to get better, someone who thinks the market is rigged, someone who is bored and doesn't want to trade on their own, someone who is at their wits end with the market etc etc. Whatever the reason is that brought you here today, if there is one thing that you take away from this site please let it be this -- Form a plan and stick to it.
Let's run an experiment. Close your eyes and think of the last person you spoke to about the stock market that isn't an active trader/investor. What was the first thing they asked when you told that person about the market or a trade you took? Almost all of you probably thought "How much can I make?" That comment is so unbelievably common it almost always makes me chuckle. That comment is why I wanted to start here, at the very beginning.
Most people who fail when it comes to investing/trading do so because they lack focus and conviction in their plan. Whether it's not knowing your setup, not trusting your setup, or just plain old greed, lacking a plan or not sticking to one will almost always ruin you as a trader/investor. Having a plan is so important that I felt it must be addressed at the very top. Having a plan is the fundamental backbone to investing/trading. It is something that anyone can do, even if they have no stock market experience.
You might be asking yourself "How do I form a plan if I don't know anything about the stock market?" Ah, that's simple, by using a stop loss.
- Stop Loss: In simple terms, a stop loss is your emergency exit strategy. It's the absolute maximum you are willing to lose on a trade/investment that you place.
The most common mistake I see from new and seasoned investors alike is not respecting their stops, or worse, not having one. Even more troubling, and like the experiment we ran at the top, many who are new to investing (or worse some who have been doing it for years) think in terms of what their profit will be prior to entering a trade, rather than what they could possibly lose. This is a fool's mindset. The key to investment/trading is capital preservation. You simply cannot preserve your capital if you do not know what you can possibly lose.
So if you take nothing away from this post, or any other post in the future, please take the following away; Always know what you are willing to lose before you enter a trade. Always know your breaking point.
That simple rebalance of your thought process will set you apart from most investors/traders and put you on the path to success.