Email from a YTC reader who I'll leave anonymous! 🙂
Hi lance. How are you? I wanted to ask you, do you use hard stops or mental stops? I had a trade today go wrong on me because I think either my stop was too tight or I shouldn't have used a hard stop. I'll attach the trade. Thanks!
Here's the attached image:
NB. The horizontal white line at 32.78 is not an S/R level. This is simply the last traded price.
What I find most concerning here is (a) the trader referring to the trade as "stupid", and (b) informing me that this left him feeling out of sorts for the rest of the day.
Hard stops… always. NEVER be in the market without a hard stop somewhere. What if you have a heart attack right after entry and get taken off to hospital, unable to close out your position for a few days?
So… you had a loss, hey!
I assume it was a 1R loss???
Please read this prior article –http://yourtradingcoach.com/trading-process-and-strategy/omg-one-of-my-trades-lost-money/
The trade was not stupid.
The trade was not the problem.
The stop out was not the problem.
What was a problem is the way you let it affect your mindset following the trade. Why did you not seek re-entry? Why did you not look for the next trade opportunity. It's a 1R trade loss!!!!!!
Are you perhaps trading with too much size?
(1) You have to expect imperfection in your trading decisions and actions. And work out how to profit despite this imperfection.
Things won't always work out.
If you had a soft stop maybe 10 cents below the swing low, for example, I guarantee there will be times the market will move those 10 cents convincing you to scratch the trade before then reversing again and moving to profit without you.
In fact… no matter how far away you set the stop, there will be times the market takes it out right to the cent. And the further away the stop… the greater the loss!
We are imperfect creatures attempting to operate in an environment of uncertainty.
Expect imperfection. And work to profit despite that imperfection.
(2) If you want to use mental stops, then at least make sure you have a hard stop in the system WELL AWAY from current price action and beyond your mental stop location. This is an "emergency stop" that simply caters for those once a decade or even once a trading career problems that might suddenly leave you unable to exit the trade. At least you can be sure that the broker will close your position before complete financial ruin.
Just be VERY sure that you remove the "emergency stop" after the trade is over. You don't want to inadvertently be triggered into a new unplanned position! 🙂
(3) The thing with tight stops is that you absolutely have to be comfortable taking a loss and then re-entering if the premise is still valid. Many people struggle with re-entry. The only way you'll find out whether or not it suits your personality is through trial and error. I will say though that it gets easier with experience. And that it gets easier if position sizing is small enough such that a 1R stop out causes no great stress. Again… consider the suitability of your position sizing.
And especially here –http://yourtradingcoach.com/trading-process-and-strategy/the-psychology-of-re-entry/
(4) My intent was not to make fun of this trader who thought his trade was stupid. Rather, I've shared this simply because it contains some great lessons. We all go through these exact same situations where we feel stupid for less than perfect trade outcomes. It takes time in the markets to REALLY GET the fact that this is a normal part of trading. No matter where we put our stop, whether hard or soft, the market will at times move just far enough to trigger it.
What is important to remember is the fact that the aim of our trading business is not to necessarily profit on any one particular trade. Rather, we aim to profit over a SERIES of trades.
If you take a 1R loss… fine. That's part of the game. Move on to the next trade. It's coming along soon and it needs your complete focus.
Much respect and thanks to the trader who sent me this question… and for permission to post it for the benefit of others! 🙂
(5) The trade was definitely not stupid! Re-entry would have led to an awesome trade. Sometimes a good trade takes two attempts to get into a position.