10 Tips If You're Losing Money In A Bull Market
There is really no such thing as an “easy” market to make money in, however, some markets are more conducive to success than others, and over the past three months, we’ve been in one of those markets.
There’s no way to sugarcoat this, so I’m just going to Kinison it - if you’re not making money in this market, you need to seriously re-evaluate your trading.
And conversely, if you’re making money hand over fist right now, you need to make sure it’s because of your trading, not just because everything – okay, tech - is going straight up.
So, if your trading P/L is bleeding red, I’ve got 10 tips that will help put it back in the black.
Cut your position size – Everybody goes through losing streaks, and if you are in one right now, you should be progressively cutting your size down until you return to your winning ways. This ensures that you’re trading the smallest size during your worst periods. Think of it like an out of control night in Vegas; as it gets later in the evening, you should be drinking less, not reaching for the beer-bong.
Stop trying to short stocks – No matter what type of market we’re in, short selling is the hardest thing for a trader to do profitably on a consistent basis. Those that can are part of a very small and specialized group. It may seem “cool” to try and make your money selling short, but what is really cool is just making money. Besides, every time you short a stock, somewhere a kitten dies.
Trade less (make more) – Take it easy Racer X, you don’t have to go full bore all the time - besides, you’ll never catch the Mach 5. There’s no law that says you have to trade every day. If you’re consistently losing money, trading more often will just increase your rate of loss. Dial it back a bit and take that extra time to review your charts and find optimal setups. Then maybe Trixie will finally pay attention to you.
Stay away from low-priced stocks – Trading cheap stocks seems tempting, especially if you have a smaller account, but these stocks are often illiquid, with wide spreads relative to their price. Not unlike short selling, this is a specialized trading niche, and right now, there is no lack of well-capitalized and liquid stocks making big moves.
Pay attention to what the market is telling you – If, out of the blue, your wife starts going to the gym, getting “elective” procedures, and wearing high heel boots to work, you better pay attention - or find a good divorce lawyer. Each time the market takes a nosedive I see the streams come alive with traders closing out their longs, or going short. They are not paying attention. That is not what the market has been telling you. It has been telling you that this is a “buy on the dip” market, where you add to longs on support - and certainly don’t short. At some point, this will change, but until then, don’t fight the trend.
Trade the best sectors – Overall market tone is the most important factor in moving individual stocks, and right behind that is sector performance. If you’re not trading in sectors that are moving with the market, you are putting yourself at a disadvantage. Just look at pot stocks during this recent rally; they have been nothing but dogs. Make sure that you are trading stocks in sectors moving up with the broader market.
Check your methodology – Or more importantly, make sure you have a methodology.
Review your risk/reward ratios – Are you averaging larger losses on your losing trades that profits on your winning ones? If so, you need to adjust your risk/reward parameters when entering a trade. The minimum you should strive for is a 1:3 ratio, which means you can win on a smaller number of trades and still be profitable. Make sure to read my post, “The Most Important Concept For Successful Trading” to learn more.
Eliminate external distractions – One day, in 2005, I was battling a bad market, a bad Wi-Fi connection, and forcing bad trades. Even worse than that, my wife kept bugging me every three minutes or so. “Honey, can you come over here?” she said. “Yeah, yeah, just give me a minute,” I replied. Finally, she said, “honey, I think the baby is coming!” Out of deference to her, and the doctor, and the nurse, and the intern staring at me, I closed my laptop and stopped trading for the day. (Oh man, I wish I was kidding about this story). Point is, if there are distractions in your personal or professional life, they can cause you to lose your focus. If you can’t eliminate distractions, it might be best to hold off on trading until you can get a handle on them.
Subscribe to a legitimate trading service – As I have written about in the past, I am a big fan of quality subscription services. If you are a newbie trader, it’s like having an experienced mentor, and if you are a seasoned trader, it’s like having an extra pair of eyes on the market. The money you make from trading spends the same way no matter if you found the trade yourself or somebody else gave you the heads up, so put your ego aside and make good use of this tool.
In addition, find an interesting and informative newsletter that talks about the relationships between markets and life in a humorous and relatable way.
If only there were a $10/mo. newsletter like that?
Maybe trading isn’t for you? - Maybe you just think it is? Maybe you are using trading as a tool to make you happy, fulfilled, or to feel good about yourself? But maybe it’s the wrong tool? Maybe you should be doing something else? At least consider this idea.
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P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.