April 30, 2007

In this week's free newsletter, we'll examine a key aspect of maintaining your edge as a trader:  Protecting the Downside.

Psychology plays a huge role in the market, not only for the masses, but for each of us individually.  We all seem, at times, to be motivated by greed and fear, buying and selling when those urges are at their greatest or when uncertainty reaches a peak.

Begin With the End in Mind

Because these urges can impact our decision-making, it's always been helpful for me to begin with the end in mind (to borrow a phrase from Stephen Covey).  In trading, that means I need to plan an exit strategy on the front end of the trade.  Flexibility might be needed as the trade evolves, but having a "Plan A" puts me 1 step closer to a "Plan B" if something requires it.

Planning for the upside is the easy and fun part of setting up a trade.  It's the part where we sometimes get carried away with how much money a trade might make for us if it works.  But it is far from the most important part.  The most important part of planning a trade is knowing how to contain the downside.  Protecting against a worst-case scenario is the single best thing we can do as traders, and limiting the number of dollars we put at risk will keep us in the game to continue seeking profits.

Protecting Another Kind of Capital

Protecting our downside isn't just about dollars.  Of course every trader needs funding in order to continue operating in the markets, but theoretically, one could always go out and earn another dollar and return to the trading arena at a later time if the first attempt doesn't work.  There's something far more valuable to a trader that many ignore: confidence.

Stick a fork in the trader without confidence, because he's done.  Having a fat account and excellent tools at your disposal for trading is akin to a lion without a roar.  When it comes time for the hunt (pulling the trigger on that setup you've been stalking), if you don't have the guts or the confidence to execute, profits never land on your screen and you go hungry.

By having the discipline on the front end of a trade to set an emergency exit, it will pay huge dividends over time.  Not only will you find your account drawdowns are smaller, but your confidence will never erode away.  Protecting your clarity of mind is the byproduct of containing the downside, and it will leave you with a tradable edge for as long as you are willing to cut those losses quickly.

Here at TheStockBandit.com, every single trade is selected first and foremost by how limited the loss would be if it doesn't pan out, and THEN the potential gain is evaluated.  We provide every pick with an exit strategy for our members, who often later state that learning to limit losses was the best thing they ever learned to apply with their trading.

Learn to Protect Your Downside Here!
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Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

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