Never Hold a Loser Overnight

Most smart stock traders like to begin each day with a blank slate. That means they dump all their holdings by the closing bell, or for sure, in the extended trading session. They rarely hold a trade overnight. And if they do, it’s a stock that’s known for gapping up on the following trading day.

Breaking that rule is probably one of the biggest mistake traders make, especially beginning stock traders. They get married to a position and—even though the stock is handing them a painful whipping—they take the trade home with them. The hope is that the stock will shape up overnight and show a profit (or at least break even), the next day.

The trouble is, all too often, the stock digs an even deeper hole the next trading session, and it multiplies your pain accordingly. Worse yet, the growing loss now becomes a huge distraction and threatens to screw up your game plan until the pain becomes so intense that you finally sell and take the loss.

Sound familiar? It should. We’ve all done it. But it is, admittedly, a hard lesson to learn. I suspect that’s because most traders, nay, most people, are reluctant to admit “defeat.” They think to themselves that if they just wait it out, the stock will reverse course and make them feel all better.

Adding insult to injury in this story is that sometimes this trading working actually works. The trader holds on to a dumb trade and lo and behold, it miraculously changes direction and eventually shows a healthy profit.  That, of course, is the worse thing that could happen. It sets you up for more faulty thinking the next time you’re faced with the same situation.

But just become the trade righted itself once, is no guarantee it will do so a majority of times. It won’t. I suggest you do your own math to prove it. Just keep a log on how much money you lose by holding a loser overnight, compared with the money you earn by dumping a bad trade and moving on to a profitable new one. I bet you the odds are at least 4 to 1, maybe more, showing that dumping a bad trades is the wiser solution.

Remember this:  The biggest reason why some stock traders fail to make money is because they don’t control their losses. And the way to start making money is to stop losing money. Get out! And above all, never hold overnight a trade that’s not going your way. I’ll say it again:  Control your losses and the profits will (favorably) take care of themselves.