Investing and Trading Rule #1

Recently, I wrote about the most important part of stock trading. And today, I want to expand on that.

Because when it comes down to it, the critical concept of positive expectancy I previously espoused on, is based on trading and investing rule #1. So what is this rule?


Trading and investing rule #1 is: don’t lose money.

Of course, in risky and speculative activities like trading and investing, this is impossible. There’s no reward without risk. But as long as you don’t lose A LOT of money, then you’re doing well. It’s about avoiding the crippling losses that can take a big bite out of your account.

Now, this advice to not lose money is pretty basic. And some of you might even scoff at it. But keeping losses small (and risk in check) is key to lasting success in the stock market. Plain and simple.

So here are some of the common ways people lose a lot of money on their stock trades and investment strategies:

— not having an exit plan
— not sticking to their exit plan, often due to emotional shortcomings or a lack of discipline
— not using stop losses
— changing a stop loss after the order has been placed
— falling in love with a stock or security
— holding a stock in a downtrend
— averaging down into a losing stock
— ignoring data that refutes your hypothesis
— not wanting to admit you were wrong

As you might have guessed, it usually comes down to that last reason. Your ego wants to be right; often, more than it wants to make money. Seriously.

So the question becomes: are you controlling your ego, or is it controlling you?

If you’re not sure, just look at your portfolio. If you’re holding any big unrealized losses then the answer is likely to be yes. Even if you tell yourself it’s a (mis)adventure in fundamental investing, well, are you sure your initial thesis hasn’t changed?

Think about risk management. Like they say in the book What I Learned Losing a Million Dollars: there are only a couple reasons people lose money. There are infinite ways to make bank. But only a couple ways to lose it.

So don’t lose money. Keep losses small. And survive to fight again another day.

You need money management skills the REST OF YOUR LIFE. Take it seriously. And don’t lose a lot of money.

No stock trading methodology is perfect 100% of the time. So you need to know how to lose before you can consistently win. Do you?

And finally, sitting on the sidelines isn’t an option either. Sure, inflation is low right now. But that can change and over the long term, stuffing your cash in a mattress isn’t a viable strategy. The risk of inaction is the greatest risk of all.

Maybe that robo-advisor isn’t such a bad idea after all. At least they’re not likely to lose your money. Can you say the same thing about your trading?

I hope so.