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The Most Important Trading Decision You Must Make
Education | 27 August 2014
By: Stuart McPhee
Articles (22) Profile

I was once fortunate enough to take a ride in a Royal Australian Air Force F/A-18 Hornet fighter jet.

In preparation for the most exhilarating flight of my life, I received a thorough safety briefing from the pilot. One thing he said to me stands out as being relevant to trading.

While briefing me on the operation of the ejector seat that I would be sitting in should I have to use it, he told me, “If you hear me yell ‘Eject! Eject! Eject!’, then with both hands pull on this lever.

One more thing: you will only hear me yell ‘Eject!’ once.”

That last remark stayed in my mind. Simply, once the pilot thought his aircraft was going to crash, he would not hesitate to eject. Investors need to apply the same mindset to trading.

Know When To Get Out
One thing that defines successful traders is that they have a clearly defined plan for getting out of a trade regardless of whether it is a winning or losing one.

The planning and execution of exits is far more important than that of entries. In fact, it is the most important trading decision you will need to make regularly.

Too many investors overlook this part of trading or underestimate how important it is. It is selling that determines whether or not you make any money trading. Entering a trade is simply a means of putting yourself in a position to make money.

Throughout your trading life, there will be countless occasions when you enter a trade only to see the price move in the opposite direction from what you had anticipated.

Losses are a part of trading. They happen to everybody. What matters is how you react when a loss occurs. This is when the rule of ‘cutting your losses’ comes into play.

Curb Your Emotions
Consider the emotions a person experiences when contemplating cutting a loss. When you have entered a trade and the price moves against you, this clearly means your initial decision to enter was wrong, and closing the trade at a loss confirms your mistake.

Accepting that you were wrong can be difficult and unfortunately there are many people who cannot bring themselves to do it. Yet, it is essential.

Some of the best traders in the world are very humble people because they have to be. They know they won’t be right all the time. When facing a loss, experienced traders do not hesitate to get out of that trade and move on to the next one.

By doing so they are eliminating the chance of watching that losing trade magnify into a significant financial loss.

So when you are facing a trade that isn’t going the way you expected it to, and before it goes from bad to worse, there should be no doubt in your mind as to what you should do immediately: Eject!

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Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

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