Monthly Archives: November 2008

A Trading Psychology Lesson From a Nine Year Old

I was driving in my car the other night with my twin daughters when the conversation somehow turned to what they wanted to do when they grow up.

Naturally, being only nine years old, they had many ideas. There were those that I was very happy with – an astronomer, a veterinarian, a professional soccer player, or a guitarist in a rock band. And there were some suggestions that I just didn’t like at all. Not that it’s my decision! I’ll naturally support them in whichever path they chose for their life; however let’s just say a nine year old should not know what a Forensic Scientist does.

I asked if either were interested in trading, to which Caitlin replied, “But isn’t trading just guessing?”

That was unexpected! I was a little taken aback and frankly quite annoyed that she thought that all I did was ‘guessing’. I replied by explaining that there was a lot more to trading than just guessing which way the market went. But the conversation quickly moved on to other areas, as appears normal when speaking with nine year olds.

That night I put a little more thought to our discussion, not so much out of concern about my daughter’s perception of my career, but rather my emotional reaction to her statement. Why should I allow myself to feel a little insulted by claims that all I do is ‘guess’ market direction?

What do I actually do in the markets?

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Tight Stops

Here’s an extract from a great email conversation with one of the YourTradingCoach readers, in which he discusses the use of tight stops:

“I adopted this approach in the beginning, but got stopped out of the market so many times I started to widen them. I’ve had on too many occasions the market pull back on my stops only to find that it went on to do what I thought it would. Meaning, I lost out again on a good trade. However, I do admit the financial risk is higher. But expecting the market to move fast every time in your desired direction is a lot to ask.”

This is a common observation. There’s nothing more frustrating than being stopped out and then watching the trade move on to your target without you.

There’s actually no right or wrong answer with regards stop placement, only what makes you money and what doesn’t. So if wider stops provide a greater edge for your trading as it does for this reader, then that’s absolutely the right thing for you to do.

For me though, wider stops just don’t fit with my trading style, risk tolerance or psychology.

In any case, I thought it might be beneficial for some traders to hear a little about what tight stops mean to me.

It is my belief that regardless of whether a trader uses a tight stop or a wide stop, it should be in exactly the same place.

Having tight stops doesn’t mean finding an entry and then placing a stop loss a small fixed distance away and just hoping it isn’t hit. Regardless of whether a trader’s intention is to operate with a tight or wide stop, the stop loss should be placed in a position which invalidates the setup.

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