Stops – Frustrating!

Here’s a great question from one of the www.YourTradingCoach.com subscribers. I thought it would be good to share this one as there are some great lessons here:

 

Question:

Hi Lance:

I’m really lost on this issue of stops….. I know you have a very different viewpoint on it – I’ve seen your video on the site.

However, placing stops or not is one of the most frustrating and perplexing issues. Just this month a simple instance – last week I exited my position in oil related stocks / etf’s at a sizeable loss (as it was made out to be as though oil is going to sell as cheap as water!!!!) only to see this week the trend reversing and futures going beyond 41 today…… not only erasing my losses but giving me a good profit had I held on to those positions. There’s nothing more frustrating to see you book losses and then it go the other way round and yield  a profit had you held on to them.

Is there a way to fix this issue or does everyone go through it?

Thanks,
M

 

Response:

Hi M,

Welcome to the frustrating world of trading.

Every trader goes through this, and not just in the beginning. I still get many trades that I exit, either at a price or time based stop, and then watch the market move without me. It’s totally normal.

Don’t worry about missed opportunity. The important question is, how did you manage the risk on this trade? Did you pre-define your risk before entering the trade?

Were you comfortable with this level of loss? If not, you were trading too large a position or with too wide a stop?

Did you actually exit at your stop, or did you let it run further because you were sure it was going to come back? If you let it run, why?

You cannot know in advance which trades will be winners and which will be losers. The result of any individual trade is essentially random. Read ‘Trading in the Zone’ by Mark Douglas, if you haven’t done so already.

If you planned this trade with a predefined loss point, and the market got to that point, and you took the loss, then well done – you traded like a professional.

Be happy to take your losses. They tell you that either your analysis was wrong, or your timing was out. This is important information, allowing you to prepare better for the next trade.

Have a look at the chart. Once stopped out, was there a reentry signal? If not, who cares about the missed profits. They weren’t available for the taking. If there was an entry setup and trigger, why didn’t you take it?

Basically, there is nothing unusual about what has happened to you. But don’t let any lessons get away. Analyse your reasons for the trade and the way you managed it.

Here’s another quote from a book I’m reading at the moment – Techniques of Tape Reading, by Vadym Graifer and Christopher Schumacher – “Professionals take a trade when they are comfortable with the risk, while amateurs do it when they like the potential profit.’

Make sure you managed the risk.

Cheers,

Lance Beggs

 


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