Lose to Know How to Win


Here's a reality check:  there is not a single trader that has not had a losing trade.

The stock market is callous. It demands constant re-evaluation of our strategies and will rattle us both mentally and emotionally, regardless of how long we've been in the game.

I know it’s everybody’s sin - you got to lose to know how to win.
— Aerosmith, "Dream On"

So check your ego at the door - the market could care less about it, and if you think you're never going to lose, than trading stocks is probably not meant for you.

The best traders have bad trades. Take Tim Grittani - he's famed for turning several thousand dollars in savings into over a million dollars in riches, initially through trading penny stocks. He has since transitioned to trading big board stocks, but he openly admits that the transition wasn't easy and that he too took a big loss in the process.

What we must acknowledge than is that it is necessary to learn from our mistakes in order to advance in our trading ability. This is what distinguishes traders who succeed from those who fail in the long run.

There is no doubt that natural talent may contribute to trading success as well, but it is our assertion that many potentially great traders cut their journey short by over inflating their expectations and not accepting losses when the market goes against them.

Respect Price Action

A common reason why traders incur losses is because they don't respect price action. Price is a reflection of sentiment and will adjust to it as market participants shift in their bullish versus bearish persuasions over varying time frames.

Let's take a look at the chart below. AAPL and BABA, two stocks we've highlighted on the blog earlier this month, had recent breakouts that should have been respected by the bears betting on price breakdowns instead.

$AAPL : Apple Inc. ; $VSLR : Vivint Solar Inc. ; $BABA : Alibaba Group Holding Ltd. 


On Friday, AAPL had its first weekly close above $103, finishing at $105.22. Notice that the $103 level has been a formidable resistance area prior to last week, when the bulls finally pushed the stock above it on a favorable earnings report and the company's continued committment to its stock buyback program.

In the case of BABA. the stock finally closed above $90 on 10/21; prior to this date, the stock had not closed above $90 since 9/26. This was desirable for the bulls and served as a clear signal for the bears to back off. By 10/24, BABA traded as high as $98, closing the week at $95.76.

To tie it all together, Vivint Solar Inc. (NYSE: VSLR) is a stock that is finally showing some signs of life after its post-IPO pullback. The stock began trading in early October and bounced off of support at $10 after falling from its initial highs of over $18 a share.

The $14 level is key resistance for VSLR bulls to overcome - a close over this price would be worth watching, as the bears have kept the stock from finishing above it since its second day of trading on 10/2.

Can VSLR bulls repeat what BABA bulls did in the weeks to come? If they can, bears would be wise to have deference for the price action and cut their losses short.