One type of investment that many income investors like more than equities that deliver a steady flow...
Everything You Needed to Know About Trading You Learned in Kindergarten (Part 3)
04/22/2009 12:01 am EST
By assuming the stop loss money is gone, I have also dealt with any emotions associated with the trade if it turns into a loser: I've already lost that money, right? But if it turns into a winning trade, I not only get the profits I accrue in the trade, but I get the initial stop loss money check back as an added bonus!
The next piece I always put into place is a series of simple limits:
- The maximum amount you are allowed to lose in a day.
- The maximum amount you are allowed to lose on any trade.
- The maximum number of consecutive losing trades you are allowed in a day before you stop trading.
- The maximum number of losing trades you are allowed to have in a day before you stop trading.
- The maximum number of losing trades in the same direction you are allowed to take in a day before you stop trading.
- If you violate one of your trading rules, you will take "X" days off, staying away from the markets entirely.
Sound restrictive to you? It's meant to be restrictive! There should be hard limits on every aspect of your trading. If you start to lose money and it turns into a series of losers, you want hard limits in place so the damage to your account is limited. If you break one of your trading rules, you are either out of control or you are very tired and ragged and badly need an emotional or physical break.
Let's try to fill in those numbers a bit and see how they might look. If you look at your current trading statistics and see that on a good day, you make an average of $500, and the maximum loss you take as your initial risk is $150 (per contract assuming one contract per trade), the numbers might look like this:
- The maximum amount you are allowed to lose in a day is $900.
- The maximum amount you are allowed to lose on any single trade is $150.
- The maximum number of losing trades in a row you are allowed to have in a day before you stop trading is three.
- The maximum number of losing trades you are allowed to have in a day before you stop trading is five. (You may have had a win or two between losses, but there is a time to stop trading.)
- The maximum number of losing trades in the same direction you are allowed to take in a day before you stop trading is three.
You'll note that the maximum amount you are allowed to lose in a day is considerably larger than if you had three losing trades in a row and lost their maximum amount. This is purposely set higher because there are times when you get unusual slippage or have a position on and an unusual event occurs, leaving you with a loss much greater than your planned $150.
You can adjust these numbers up or down, but the key is to have them in place, written down, and in front of you at all times. And never violate them. If you do violate them, force yourself to take time off from trading.
More tomorrow in Part 4.
I wish you all good trading.
"Master your tools, Master Yourself."®
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