Rule Number One: “Your first loss is your best loss,”
Good trading, no matter what it’s based on, technicals, fundamentals, or the news, requires a level of discipline that goes against human nature.
We are taught to be patient, to let things work out, not to be hasty, yet none of that works when it comes to trading. You have to be willing to cut and run, to use that “flight,” not fight, instinct that we supposedly are born with but suppress as we are grown up.
The general trading rule “your first loss is your best loss” is a critical financial adage to embrace because it addresses two trading issues: (a) Getting on the right side of a trade; (b) if one is on the wrong side, one should get out.
Most option or stock trades need to work almost immediately for them to be right. You must be willing to put a trade on and take it off immediately even if it doesn’t feel right. There’s a simple reason for doing so, trade for points, or for at least a point. Less than that is too hard.
But if you’re willing to have a trade go more than a half of a point against you, then it will be almost monumental to get back to even. So be discipline to stop yourself out quickly.
This is a very difficult lesson to learn, but we all need to work on our ability to recognize when we need to take the “first loss” and not try to push/force/manipulate/etc. the situation to create an outcome that will never come to pass.
The next time you are facing a tough situation that might produce a challenging “loss,” pause for a moment and ask yourself if this is might actually be a good “first loss”.
So, the next time you are hesitant to close a trade or position that is going against you, ask yourself if you will achieve any better result by waiting or holding the position. If you can’t think of what that better result could be, then make the decision to close a position quickly and decisively, and move on. Once it is off your plate, you will be free to go out and do what you do best—make money .
References:
- https://www.thestreet.com/static/command2.html
- https://onlinelibrary.wiley.com/doi/10.1002/9781119202080.ch7
- https://lbmjournal.com/your-first-loss-is-your-best-loss/