What are two of the most repeated mantras about great traders? They: 1) Use good money management and don't ride a losing trade all the way down. They cut their losses short. 2) Don't get freaked out by sudden market moves that are opposite of their current position. Uhm, see a contradiction? So which is it? What constitutes a losing position to get out of and one to not get freaked out about? I see these two mantras often repeated in the same paragraph by the person repeating them. I am curious to know what folks think.
If that unexpected move in the opposite direction comes, I will not be freaked out, just like that mantra says. However, if that unexpected move is big enough, it will hit my stop and I will be out of the position. I may, if I so choose, put in another buy stop back where I was before the unexpected freak move and I will be pulled back into the market again. Rarely does anybody who trades with stops get freaked out.
If stopped out for a good reason because a new high/low is being taken out then the trade simply failed. Frankly, I don't give a damn for the wiggles in between.
If you are in intraday trading you'd exit the position if it goes against you, but when the trend has been established, a sudden reversal shouldn't be a major concern and you should ride it all the way, as planned.
I guess what I'm not clear about is what constitutes going against you? If you're in a winning trade by only a few points and then suddenly it reverses to take you a negative a few points, when do you get out? How big a loss in ticks on an instrument does the professional trader stop out at? Take Forex for example. If you're negative 3, 4 or 5 pips, you stop? 10? Do you base it on the volatility of the instrument over some recent time period? Or just the moment it goes negative you're out? I guess this is the grey area that I'm talking about, just curious what folks think.
IMO, you are taking something that should be - NEEDS to be - simple, and trying to make it more complex. Simple: Place your stop based on (A) Your experience, or (B) Your system parameters. If price hits your stop, you are out. Period. If you don't KNOW where to place your stop, and why, then you shouldn't be trading. Complex: Worry about when to get out and try to predict whether or not the market is about to move one way or the other, then second guess yourself when the time comes to pull the trigger. Then beat yourself again after you've pulled the trigger. The difference between a profitable trader and a stuggling trader is the difference between the two approaches. It is that simple. If I'm trading a system that I know has statistically positive expectancy, and my stop is hit, I don't care. Because more often than not, I can see that the stop saved my ass. When you get to the "I don't care" stage, then you are on your way.
They are not contradictions as far as discipline is concerned. The first mantra is more or less self-explanatory in that the only way for you to be consistently profitable is to ride out your winners while cutting your losses while it's small. You don't need to be a trading wizard to understand that. As to the second mantra, it just basically means that you should stick to the current trend. If your game strategy is to buy whenever a given stock dips in an UPTREND, then you shouldn't freak out so much when the stock goes down some more. As long as the uptrend has not been violated, you must stick to your original strategy and not change plan in mid-air. They are both very pertinent to any successful trader.
Depends on the magnitude on the move, and above all, the cause of the move. If the move it's large enough, it's likely a change in fundamentals, or the long-anticipated and expected change in trend, i.e. bubble burst.
Good question Simple answer is sometimes you lose. Even if you are taking a high probability say 70% setup you will still lose 30% of the time. If you were betting on a turnaround yesterday you would have lost money, but today you would have made money. You can choose whether you or the market sets your max loss. Too tight a stop means you don't get a high win rate but your max loss is low. Too wide a stop means that you get a very high win rate but when you lose you lose big. You only need a couple of these low probability but high value losses in a row to severely dent your capital. I have learned this lesson the hard way. Try and find the "sweet" stop that gives you a decent [IMO 50-70%] win% and around an average 1.5%. I'm averaging 3.9pts [SnP] per win so my stop "should" be around 3pts. Cheers