Thursday, July 16, 2009

Taking a loss

Why many people are not making it in game of trading?

My guess is good as yours about this, but I would like to point that I personally know few traders and investors who are very uncomfortable with taking a loss.

Losing traders often bring a measure of perfectionism to their work, as these trades create some extra pressure. They equate a good trading day with a profitable day. No, no, no! A good trading day is one in which you have followed your well-researched plan with focus and discipline. Good trading days, over time, will generate profits if your trading plan and risk & money management make sense. But, the uncertainty of the markets means that even the best laid trading plans can go awry. 

In the short-run, you cannot control your profitability.

You can control whether or not you have good trading days, which will generate profits over the long haul—if you have adequately researched your strategies.

The perfectionist trader equates taking a loss with experiencing failure. The loss thus sets up a rash of negative internal dialogues and subsequent trades born of frustration. A more realistic trader realizes that there is a degree of uncertainty built into the market and that losses are simply a cost of doing business. The goal is to limit these losses as effectively as possible, not exclude them or become preoccupied with them.

System which is used here by us to trade ALSI is always in the market: It will stop your position and, at the same time, it will give entry for position in opposite direction. So, we should not worry much about stop losses, as price levels and chart structure are there to act as stop loss for every trade we take.

If you are using different system, you can base your stop losses on:

1) Price – when certain price level is broken (to upside or downside) you close your position;

2) Time – this one is for intraday traders who are closing their trades at the end of the day w/o any consideration;

3) Indicator – if your indicator clearly suggests that your position is not correct. 

Once stops are set, they should be mentally rehearsed while the trade is on, as a way of ensuring that they will be honored. A good loss is a planned one; the only true market failures are the ones that are unintended.

Discipline is at the heart of exemplary trading: When you set, rehearse, and honor stops, you are building that discipline and using your losses to reinforce the qualities needed for success.

Successful traders plan for “failure”; unsuccessful ones fail to plan.

Trade with trend!

This blog post is dedicated to work of Dr. Brett Steenbarger.

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