Many a trader have blown accounts this way. It's definitely a strategy the 90% use. If you're like me, I know you wont change the way you trade until you start taking huge hits and near blow your account, so here's what I suggest you do. Keep doing what you're doing, but keep track of when the trade goes against you and mark where you should cut your loss but don't. You'll either hold till it turns around or hold til you lose so much money you have no choice but to get out. Then add the differences. Example: ABC stock Buy in at $10 goes to $9 where you should sell, but comes back and hits $11 XYZ stock Buy in at $10 goes to $9 where you should sell, but you average out back at $10 BCD stock buy in at $10 goes to $12 and you sell and profit. WXY stock buy in at $10 goes to $12 and you sell and profit. SHTF stock, buy in $10 goes to $9 where you should sell, keeps going to down to $3 before you cut your loss. So in this scenario, doing what you do, you end up making $5, but losing $7 so your account is down 20%. If you had cut your losses, you make $4 and lose $3 So you're up 10%. You'll also notice that the win rate is 80% with your strategy and only 40% with the cut loss strategy, only difference is the 40% win rate makes money. So yeah...keep track of where you should cut and see how much you'd be up if you cut losses where you know you should instead of holding until they turn around.
My holding on to trades is a consequence of not having the ideal entry point from my first try. I'll stay in a trade and potentially add if the overall premise is still intact. I will bail once the premise is invalidated. The alternative I guess is to take a bunch of small losses until I get the right entry and get to ride the momentum to where I expected it to go... but in my mind it just doesn't make sense that way. We are here to make money, not be perfect or right. The thing is if I am right from the first entry and it goes to my target, it is usually smaller size than the ones that I averaged into. I can see how the math doesnt add up at the end. What I need to do is, also add to trades as they go my way to end up with similar size wins and losses or bigger wins.
Technical analysis is such a small part of trading. The more I trade the more I realize this. It's all about trade management and risk management. Even if you mess up your initial entry its still possible to make money on the trade as long as your chart reading is at least somewhat component and you dont exit the trade at the worst possible time. My equity curve from the start of August is in an uptrend but the draw downs are pretty big. I end up making winning trades which gives me confidence to increase size then bam I am wrong and back to smaller size and again winning then Bam, I get over confident and think this next trade is a sure thing and put a few too many contracts.. same thing over and over again. At least I am no longer consistently losing.. I guess I am now in the boom and bust phase of trading... Next phase consistent profitability. I base my actual Risk % off my cash reserves (net worth) not the amount that I have in my trading account. I've had trades that wipe out 25% or 40% of my actual trading account but again I keep just enough to satisfy margin and not do anything stupid. Even with those losses I was able to keep my equity curve up trending and have not had to re-load the account since August 1 and have been withdrawing funds regularly.
I took a snippet from Spouts post and posted it in blue italics below: "However as an exercise, it’s valuable in training oneself to accept losses much smaller than they otherwise would have been when one is on the wrong side of the market". A tick is a tick no matter what side of the trade it is on.
First of all, you need to keep your ego aside. Don't let your ego get in the way of your progress. You need to understand that there will be losses in the trading process. You can't avoid them. You need to learn from your mistakes as much and as quickly as you can. Otherwise, your stay in the market will be short.
whenever in doubt read success stories of other traders, there will always be hundered of losses and one big win, which motivates me to go on everyday.
I took another hit to my account this last week. I realize now what happens as I was able to observe myself in the process. I have been having a pretty good run of trading with most of my calls being correct. Its easy to manage winners so that worked out great. Then I had a loser which ran away from me again. When shit hits the fan my body goes into panic mode and the stress just turns up, I cannot think clearly or act appropriately. It is like a deer in the headlights type reaction. I have come to the realization that at this stage in the game I am simply not mentally or physically equipped to trade without HARD STOP's in the market. It would be great if I had a risk manager to pull the plug for me but being independent this obviously is not an option. I may have a slightly lower win rate with a few fakeout stop's but this does not happen that often with the method that I use. This will be the price of doing business from now on. It is sad to have to admit that I fold under pressure when the market really goes against me but this is the reality of the situation.
No, it was actually profitable at some point, If fact it was profitable twice which in my mind makes it hard to cut when they turn against you. I held the trade as there were some support levels below that I was sure would hold... but as they broke down. I entered into what I like to call deer in the headlight syndrome. This particular trade was not really part of my usual trade strategy. It was more of a FOMO chase trade. Analyzing it now in hindsight its obvious what went wrong.