Trading Rules/Psychology

“We’re taught in the school system that anything less than 70 percent is failure. As a result, we want to be right at least 70 percent of the time in the markets. But when you have this bias, the result is that you won’t take losses. You’ll think the losing trade you’re holding might turn around and become a winner, so you won’t take the loss. Eventually the loss becomes huge so you have to take it or you turn into a long-term investor. The flipside of having this bias is that you want to take profits right away. Why? If you take profits right away, your trades have no chance of turning into losers and you get to be “right.” But this flies in the face of the golden rule of trading: ‘Cut your losses short and let your profits run.’ By needing to be right you end up doing the opposite, cutting profits short and letting losses run.”

Dr. Van K Tharp