It’s all Part of the Painful Process
Dear Penny Stock Millionaire,
I’m very blessed to be able to focus on the process. Most people have to make profitable trades just to pay the bills. Or to keep disapproving friends and family at bay. But what you have to understand is that the money you make OR lose in the beginning — the first 9, 12, or even 18 months is negligible compared to the upside 24 or 48 months down the road… if you focus on the process.
You must have a trading plan for every trade you make — and that has to include an exit. A lot of ‘gurus’ and other traders love to focus on profits. But you also gotta know your point of maximum pain.
So if the trade doesn’t go as you thought, where will you get out, accept your loss, and live to fight another day?
Remember: this is a marathon, not a sprint. Prepare for the long run.
Some of the most successful traders I know lose 60% or even 70% of the time. These traders make huge profits on their wins and keep their losses small. It’s all about managing risk/reward.
Losses are part of every successful trader’s process. Learn how to take trading losses like a pro.
Is it easy? Nope. A lot of traders never learn this lesson. It’s the primary reason 90% of people fail at trading.
How Professional Traders Focus on the Process
No one’s perfect, not even the professionals at the top of their game. Here’s what the pros do:
They treat trading like any other business. And businesses come with ups and downs, expenses and income, wins and losses.
Trading is no different. Think of losses as an expense that all traders pay. No trader has a perfect record. We all lose sometimes. But you can learn to keep your losses small.
How Tim Grittani Cuts Trading Losses
My top student of all time now has more than $8.5 million in profits.
Ask Grittani, and he’ll tell you that his most important trades are his losses. Why? Because he learns from them.
Yes, we all want to make money from our trades, but understand that losses are part of every trader’s reality. Even the best traders in the world have to cope with losses.
Grittani approaches trading a little differently than I do. He “cuts losses intelligently,” which is a little different than my method of “cutting losses quickly.” The key takeaway is still that he cuts his losses. Learn from Grittani’s losses — don’t let them get too big.
All great traders who have long-term trading success have a plan to get out of their trades when they go against them. As a new trader, you need to stick you your plan and cut your losses quickly. So if you wanna try Grittani’s method, that’s great. But get consistent first — don’t just try it if you’re completely new to trading.
Also remember that Grittani didn’t make anything for his first nine months of trading. So if arguably the best penny stock trader in the world took nine months to become consistent, it will probably take you longer.
And that’s OK.
How to Avoid Big Losses
I want to share a few tools that can help you develop your loss-cutting abilities. This is the most important skill you will ever learn in trading. Given that trading is highly personal and everyone must develop their own style, these are just a starting point.
Get Out Quickly
When you enter a trade, you should have a trading plan based on your thesis. You want to be clear about what you think will happen. But don’t expect it to happen. Instead, react to the price action. If something doesn’t look right … get out! If it breaks through a support level or fails to hold a breakout above resistance … get out!
If the price stalls or volume dries up, exit the trade. If you’re in the red when you expected to be in the green … don’t wait, get out. Don’t ever hold and hope.
Here’s the thing, sometimes you’ll exit a trade and then the stock does exactly what you predicted. It happens. Learn from this. Study the chart and see if you can change your process for the next trade.
Don’t search for a reason to stay in. Sometimes you have to take a small loss and move on to the next.
Changing your process is OK. Just don’t do it in the middle of a trade. Stick to the original plan you made before entering the trade. The trade thesis you came up with before you put any money on the line is usually the best one. Only change your process after you exit the trade and evaluate what happened.
When Should You Use Stop-Loss Orders?
Full disclosure: I don’t use stop-loss orders. I use mental stops.
I’ve been doing this for over 20 years and am successful in using mental stops. But as a teacher, I’ve learned that so many people struggle with sticking to their plan once they’re in a trade.
If you struggle to stick to your plan, automatic stop-loss orders can be a way to make you stick to your plan. You can enter a stop-loss order as soon as you get into the trade. Some brokerages allow for an automatic stop as soon as your original order is executed.
Keep in mind automatic stop-loss orders don’t guarantee an execution price. This is a training tool for you to use while you get used to the idea of cutting losses quickly. Penny stocks move very fast. So your execution price can be far from your stop price. Keep position sizes small to limit your risk.
While it’s not my preferred tool, you can use it to help you find what works for you to minimize your losses.
Let’s Say You’ve Lost… What Now?
After you take a loss, you might feel bad. Many of you sent me messages after my two losses last month and tried to encourage me.
I’m grateful for the support, but I’m not upset at all. I’ve been doing this for over 20 years. Every year, I’ve been profitable. And every year I’ve taken losses. I understand the process.
Your job is to learn from me … Learn from my wins and from my losses. Understand it’s all part of the process. And as long as you trade, you will take losses. The key is to keep them small.
It’s OK to feel bad after a loss. Hell, it’s normal! But over time, you can learn to deal with them. But know that they can mess with your mindset…
Don’t risk additional money if you’re hung up on a loss. NEVER try to break even.
The Bottom Line
Too many new traders judge a trade based on the outcome. So, a ‘good trade’ is a profit and ‘bad trade’ is a loss. Not true. Get this out of your head. A good trade is when you stick to your plan and follow the rules, like rule #1, cut losses quickly.
If you’re dwelling on a loss, you need to take a break. Close your laptop and walk away. Do anything but get in another trade. The market will always be there. There will always be another trade. Trust me — you won’t miss anything. But you can save yourself from another loss.
Editor, Penny Stock Millionaires