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It is OK to be wrong, it is not OK to stay wrong

In my last post I wrote about a couple of shorts to hedge my long exposure in the market. Here I will show the charts. It’s useful to go back and review trades after a while, studying the entry and exit in the middle of the chart is a much better way to learn than to squint eyes at the right edge of it.

One of my principles to risk management is that before entry I always decide when to get out. There’s no good reason to make that decision later in the heat of the battle when a trader can get caught by emotions and act irrationally. When it’s time to get out with a loss, I get out. There’s no debate on whether to give some more room to run or to dollar-cost average the position.

ā€œLosers average losers.ā€ (Paul Tudor Jones)

MSFT seemed to be forming a fakeout (a failed breakout) and the overall market was becoming overextended, looking due for a pullback. I took the sell signal and got short in June (red arrow). No supply came in, MSFT held and after rejecting the downside I was stopped out with a loss (green arrow). In hindsight, it was indeed a good decision to get out as the price continued to climb up.

TSLA was consolidating at the highs around $1000 and when there was no upside follow-through, I anticipated for a short-term pullback. The overall market kept being strong, Tesla surprised and I was stopped out pretty quickly. No bad feelings, it could have gone the other way. Even looking at the chart now in hindsight, I still would have taken the same short position. The key was admitting being wrong and taking the loss.

I’ve been trading MSFT and TSLA in both directions recently, meaning I have also had long positions. A trader with no biases on the direction can easily flip it around and trade the opposite way, but this is not the topic today.

A professional trader doesn’t want to avoid losses but wants to manage losses. Losses are part of a trading system. In fact, one should want to have regular small losses which shows the trading system is working as supposed to. Having no losses means one is not taking on enough risk, therefore not using the potential to get higher returns. It could also mean that the system is about to break down big time and a disastrous loss is just around the corner. Don’t fall for the illusion of being right all the time.

Lesson Learned: It is OK to be wrong, it is not OK to stay wrong.

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