by Ryan Cooper of StockTeacher.com
This is the point where you admit you were wrong. No
one can pick winning stocks 100% of the time. Accept this
fact. You can only play the odds.
Lets say we buy a stock at $20 with the plan that
it will go up to $24. Now we have to decide what to do
if the stock does not go up, but suddenly starts to fall.
Lets decide that if the stock moves below $19, we
will accept that we were wrong about the direction of
the stock, sell the position immediately, and take a small
loss. By taking small losses, we preserve our trading
capital, which allows us to trade again tomorrow.
Before we even get into a position, we have to measure
our risk-reward ratio. In the above example, if we were
correct about our stock pick, we would have made 4 points.
If we were wrong in our stock pick, we would take a loss
of 1 point. That is a risk-reward of 4:1. Lets say
we were only correct about our stock picks 50% of the
time and we make four trades. Two were winners (2 x 4
points) equaling 8 points. Two trades were losers (2 x
1) totaling 2 points. We now have a gain of 6 points by
only selecting winning stocks 50% of the time. Assuming
we were the worst stock pickers in the world and were
only correct 25% of the time, we would still have a gain
of 1 point.
It is important to keep your risk-reward ratio 4:1. If
you can only find a risk-reward ratio of 2:1, leave it
alone, sit on your hands, and do nothing. If the market
is behaving in a way that you can only find risk-reward
ratios of 2:1, you probably have no idea as to which way
the market is going to move. The market spends most of
its time moving sideways. I have seen many traders lose
most of their capital by making themselves trade when
they should have stayed on the sidelines.
I still remember the first time I stared at the screen
the entire trading day from 9:30 a.m. until 4:00 p.m.
without making a single trade. I was thinking to myself,
I know the market is normally irrational, but today
I have absolutely no idea what is going on. I made
some paper trades in my head, and I was glad I had left
it that. All the trades I made in my head were losers.
Even though I did not make any trades that day, I felt
like a winner. It was a great feeling to know when to
sit it out. I was right to stay on the sidelines. You
have to have the discipline to stay on the sidelines when
you do not feel comfortable. Getting into low risk-reward
positions because you want to be in the game is wrong.
It shows a lack of discipline and the punishment is losing
Article by Ryan Cooper,
author of The Stock Teacher Method. If you have been
trading unprofitably for three months or longer, then you
desperately need this course. It'll provide you with proven
strategies to trade the markets successfully starting your