4 types of trades

All your trades should end in one of four ways:

1. A small win: You take a profitable exit, this is usually a short term trade.

2. A big win: You let a winning trade run when you are on the right side of a trend. This is the biggest contributor to profitable trading as it increases the reward side of your risk/reward ratio. Trailing stops are the best tool for creating big winning trades. You leave your profit side open for as far as it will go.

3. A small loss: You exited a trade for a loss when your entry signal was invalidated by price action going against your position. Your stop loss was usually triggered quicker than you expected.

4. Break even: Your time stop was triggered or you moved your trailing stop back to even after being in a profit.

There should not be a 5th scenario. You should never experience a big loss. If you can get rid of big losses, you have a great chance of being profitable for years to come. The tools for eliminating big trading losses is proper position sizing based on a market’s volatility, well set stop losses. and flexibility in accepting when your trade is not going to work out.  Big trading losses is the primary reason the majority of traders are not profitable.

“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.” – Larry Hite