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Willingness to Accept Losses another important quality

Here is yet another important quality that the effective day trader must either possess, acquire, or develop. Perhaps the single greatest downfall of all traders is the inability to take a loss when it should be taken. Losses have a nasty habit of becoming worse rather than better. Unless they are taken when they should be, the results will not be to your liking.

Although it is easier for the day trader to take a loss than it is for the position trader (since a loss must be accepted by the end of the trading day), it is still the downfall of many a day trader who is unwilling to accept the loss when it is a reasonable one. The good day trader must have the ability to take a loss when the time to take that loss is right. What's right is dictated by the particular trading system or risk management technique that is being used. I would venture to say from my experience and observations that perhaps 75 percent or more of all large losses occur because losses were not taken when they were small or relatively small or when they should have been taken.

I can certainly speak from experience when I say that my largest loss ever resulted from the fact that I refused to take the loss when the time was right. I allowed a $500 loss to turn into a $5000 loss. Fortunately, that was the first and last time I was guilty of that serious a transgression. Unfortunately, many traders, a great many traders in fact, refuse to take losses when the time is right. Fortunately, the day trader has two opportunities to take a loss. The first one is at the stop loss point as determined by a system or at the predetermined dollar risk stop. The second point is at the end of the day. A day trader is, therefore, fortunate inasmuch as he or she is forced to liquidate all positions at the end of the day. This will keep losses smaller than they would be if losing positions were carried overnight.

Here are some suggestions as to how you may improve your ability to take losses when they should be taken:

1. Formulate your stop loss rules very specifically. Do this whethe] they relate to systems or dollar risk amount, and type or writ* your rules in large print. Place the hard copy close to your quo tation equipment, the computer that you use for trading, or th< telephone from which you place your orders. If you do not us< a computer or quotation system for your trades, then pleas< keep your rule handy on an index card and refer to it frequentl) during the day.

2. Make the commitment to accept your next 10 losses completely as die tated by your system. Once you have done this, the behavior wil become habitual and losses will be easier to accept.

3. If you trade with a full-service broker or a trading partner, make you, broker or partner aware of where your stop loss will be. Have then remind you that you must exit your position accordingly. Yot may wish to give them the authority to do so for you, assuming of course, that your relationship with them is sufficiently clos< to allow for such a procedure.

4. Place your stop loss. A much more simple procedure, although do not necessarily recommend it at all times because of th( nature of day trading, is to actually place your stop loss as soor as your entry order has been filled.

These suggestions will, I feel, help you master the ability to tak< losses in a timely and rational fashion.