By Kerry Szymanski of Harmonic Edge*
Posted: Sep 11, 2009

Regardless of how good your trading and analytical skills might be, there are going to be times when you are flat out wrong about what the market is going to do next. No trading methodology works all the time. Losing is like breathing in the trading business. If you want to last, you'd better get used to being wrong and have a plan to deal effectively with it.

One of the most important things we can do to protect ourselves is to bring realistic expectations to the table. Don't expect other traders to see the market the same way you do. Don't be surprised when the market does the opposite of what you expect. Keep an open mind about what might happen next. Anything is possible!

When you do get surprised by unanticipated market action, it is going to test your core beliefs about yourself and your ability to execute your trade plan. If you have a lot of emotional energy tied up with the need to be right or the fear of being wrong -- or if you are just low on psychological energy -- you may be in trouble.

Only one thing can save you from yourself -- your commitment to following your trading plan. If you force yourself to limit the amount of capital at risk to 2 percent on any trade, you have gone a long way toward protecting yourself.

However, there is more you can do. If you are a day trader, you need to think in terms of a maximum intraday drawdown. I believe that 4 percent is a pretty good rule of thumb.

If you are trading the longer-term setups, you need some additional structure regarding the maximum number of positions you will hold at any one time. The longer you have been trading, the more you can likely manage. A good rule of thumb is 4 to 10 positions.

Additionally, you need to give some thought to position sizing. If you are trading longer-term setups, don't allow yourself to take a huge position in one stock or market. Spread it around a bit. A rule of thumb is to limit any one position to between 10 and 25 percent of your trading account.

Furthermore, you should give some thought to short versus long positions. If you are trading stocks and looking for a neutral market bias that would be an equal number of short and long positions, when that proportion shifts, you will reap a reward when you are correct about general market direction. On the other hand, you will be penalized if your bias proves wrong.

I suggest that you try to maintain balance and not get overly opinionated about market direction. Historically, the stock market has an upward bias. If you find yourself fighting this bias year in and year out, you may be penalized for being too bearish.

The next time you get surprised by the market (and there will be a next time), be sure that you have the structure in place to protect yourself and your financial future. The key is a carefully researched trade plan that you have made a commitment to execute with nearly flawless precision.

Picture yourself standing on a railroad track staring at the light from an oncoming locomotive. That is exactly what it feels like when you have a strong opinion about a market, and that market is doing the exact opposite of what you expect. The trader with a strong opinion is usually prepared to book a large win based on his or her analysis of current market conditions.

More often than not, however, traders are not prepared to book a small loss because they have not seriously contemplated the chance that they might be wrong. Blindsided and caught off balance, they risk the destruction of their trading soul.

One of the nicest things you can do for yourself is simply to lose your opinion and keep your money. You don't need to know what is going to happen next to make money in the trading business. You don't need to be able to figure out which patterns will work and which will not.

Simply research, build and execute a sound trading plan. Follow that plan day in and day out. Don't make losing a big deal and it won't be. Don't be blindsided by a large loss -- take care of your losses, and your wins will take care of themselves.

*Reprinted (and modified) with permission from Kerry Szymanski