I’ve been reading a lot of posts and some are too large or too numerical for me to read it, i guess most newbies do the same as me: skip the post. And hence i’ve decided to create a series of step by step threads starting with what i consider the most important thing in trading: To Limit your Loses. So I ask some help to explain and extend this issue and please be creative and try to avoid the same old stuff, i mean you must say it again but i ask you to explain your own experience.
Well this is sort of what I do to limit loses:
For start I am a mix of day and swing trader and for now i trade with Cable (GBPUSD for those who doesn’t know) in 1hr charts. If posible i risk less than 1% and I’ve defined my SL level at 25 pips and TP upto 75 pips. Let’s start with big picture and a little of sel experience: Skiping all the initial pain and the strategy to strategy stage i was making upto three trades per day with the scheeme mentioned above. Then I’ve noticed the loses were to painful and so i’ve reduced it to one trade per day and it was painful too. So after it I scaled it down to thre loses per week maximum and it was painful too. Dam! what i should do now? Ok, I changed to one loss per week an voialá, the best days of my life and then decided to stop trading once the monthly balance was reaching green numbers and start over next month. Well this adaptation took months to do because going from overtrading to just trading is not an easy thing to do, is just like smoking 1 pack of cigarrettes per day and then just smoking 1 per week. Analysing previous montly sheets I noticed something: the more I traded the more I was losing and the last months with fewer trades i was losing less and finally ended up with green numbers. But just trading less is not enough, I do something more, whenever I can I close orders manually before the price hits the SL, I mean, for me SL is a catastrophic exit when things goes out of control. My trading is based on the first minutes after opening the order, if price does not rise just a little in the next five minutes I just close the order and I try again next week.
Well I have just had my first “real” loss in 6 months!
I was quite glad I did because I was worried I wouldn’t be able to close manually (can’t use stop losses!)
So surprisingly happy all things considering!
But to limit my loss, I am trying to (didn’t succeed that time) spread my risk over several pairs.
I just went in too heavy handed this time! OOPs!
Most people, not so newbies, they have a very good idea of what risk management is. The open the trade, set SL and TP. Let’s forget about TP and just focus on loses. Our trader has a loss, Ok, not bad, trading was not going his way and acted responsabily before the disaster but he watches the price go up his direction and he opens the trade again and bam!!! Price hits the SL level, and the situation happens all the time. Here the problem is not the lack of risk management but the lack of discipline and emotional control, if you tried ten times on the same idea and all were loses your probles is not your risk management.
Part of limiting loses is to set maximum of total loss, how much per month are you willing to lose.
I attempt to research what the most probable extreme move against me (MAE) would be and I set my stop below it, to increase my probability of success. For some strategies it has been very difficult to objectively discover this level.
It remains to be seen how to trail my stop, and WOW my account is not big enough to lock in profits, I can only trade with single units 10k lots, so this is about 1-3% of my equity and I cannot bring myself to exceed it.
What was the basis of the 25 pip SL? Just from thin air or some form of this is what you can afford to loss?
No SL? You have to ask yourself, how much draw down will my account can handle before margin call? That is for for the money wise (hard facts). Emotionally, how much loss can your emotions handle before you capitulate and close your position? Only you can answer the question.
No SL and just let it ride until TP is reached if ever it is reached would mean that the trader is a perfectionist, which is very detrimental to the trading capital because the trader cannot handle to take a loss, which is normal in trading.
Uhhhhh… my SL is 25 pips but i try to close the order before it activates, never leave an order unprotected, never. Not using SL is a very stupid thing to do. The real risk level for me is 15 pips but the 1% risk is based on 25 pips. 25 pips is the maximum volatility I can tolerate. Sometimes I let the order goes down to 20 pips and if after a long the price does not activate SL i just close the order period. SL for me is a catastrophic exit and an exit point in case i cannot watch the market. So in conclussion if SL is activated i lose less than 1% and if I close it manually I lose much less than 1%
[B]Cut your loses short or just limit your loses.[/B] And no, i am not a perfectionist, i just expect price goes to my favor right away otherwise is useless, i admit that I screwd the trading and I just wait for my next oportunity, I only admit one lose per week. I am not agresive, sorry but I must be unique.
I think your approach to this 25 pip SL should be reconsidered. My suggestion is to put your SL above the recent swing high/low and adjust your position size accordingly to only risk 1%.
What do you mean [QUOTE=SL for me is a catastrophic exit. [/QUOTE]. Are you saying that when you’ll have a loss let’s say 100 pips for some reason that your account will be wiped out?
But you mentioned that you’re not aggressive, so I interpret that as having to wait for a close of the bar because you’ll never know the recent swing high or low until the bar you’re trading has closed.
If you’re entering at support or resistance then you’re not Mr. Gone, you’re more aggressive trader. Say for Example, GBPUSD, you would have entered today at 1.63 with SL at 1.6325. However, if you’re Mr. Gone or me, I would enter at the opening price at 11:01 AM EST today as the price action suggest that the price is more likely to go down that go up as price closed below the recent consolidation area high (1.6273) and the high of 1.63 on April 30.
I will enter if the bar confirms my analysis and adjust my position size accordingly. Let’s go back to GBPUSD, for me 1.6300 is a potential resistance until it is proven to be a resistance. But there is no guarantee, so proper risk management is the key.
I tried to harmonize three maxims of trading that you see bandied about here all the time.
#1) Cut Your Losses Quick #2) Let Your Winners Run #3) Never Let a Winner Turn Into a Loser
I did a lot of thinking about this because it’s one of those things which seems simple to do but in practice turns out to be a bit tricky in the real world. The reason is that you have to define what a win is and what a loss is. Defining the loss is pretty easy. You plug a stop loss in wherever your system says and don’t move it.
Defining a winner is more difficult. Is it a winner once it goes 1 pip in your favor? Is it a winner if it goes 10 pips in your favor? Is it relative to your stop loss distance? That is, if you’re trading with a 10 pip stop loss a winner might be at 12 pips profit but with an 80 pip stop loss on might define a trade as being a “winner” at 25 pips profit.
Eventually I settled on risk levels. I use 1R to define when a trade is a “winner” or not. When a trade is placed, as it struggles up I consider it to be in question. Once it hits 1R I consider it to be a “winner” and thus Rule #3 comes in to play and I move the stop loss to break even to keep this winner from ever becoming a loser.
I don’t take breaks or anything like that in an attempt to cut losses. I see a lot of people doing stuff like that but it doesn’t make sense to me. If you really do have an edge, you should apply it like a Casino. You don’t take breaks if the players get on a winning streak because the edge dictates that things will balance out over the course of many trades and you’ll be in profit. If taking losses is difficult, I don’t think that trading less is the answer, I think that building the mental skills to be able to take the losses as consistently as a Casino is the answer.
Think about it. Lets say there was a powerlifter who wanted to deadlift 500 lbs but could currently only deadlift 400 lbs. Nobody would ever suggest that the guy start putting LESS weight on the bar. That wouldn’t make sense. In fact, the amount of weight on the bar really isn’t the “problem” at all. The problem is that the powerlifter doesn’t have the strength to lift that much weight. His focus would naturally be on improving his strength…on overcoming the REAL problem. I think this applies to this losing streak and the pain of losses thing. The solution isn’t to change ones system by skipping signals (and yes, skipping signals IS changing the essential structure of a system) but should instead focus on improving himself so that the losses have as much impact as they do on the dealer at a craps table at the casino. Once this improvement has been made, the trader can properly apply his edge on a consistent basis.
No, if the price price goes against me 100 pips it will be automatically closed at 25, maybe if I am unlucky enough and a gap occurs i might lose 45 pips, that is why i don’t trade fridays.
And my operative might seem confussing and that is the idea. I don’t define my SL by the last bar swing beacuse last bar or the bar before it is just history, might affect to the actual behavior but is not the actual price anymore. My operative requires a certain specific and weird pattern to happen that in theory whould move the price upto my favor right away, in a fashion of limiting loses. Let’s say when i open the order and if falls down to -5 pips, I just let it open, but if falls 15 pips in few seconds I just close it inmediately because the idea might be right but the moment for it was completely wrong. There are rare exceptions when i let price go down to -20 pips, if it does gradually i might let it open but if it does quickly i just close it.
I try to break the common pattern and that includes handling loses, for me a trade closed in something less than +30 pips is a loss but i don’t fret out with individual trades but with monthly balance, quarterly balance, yearly and so on.
Remember that there might be thousands dudes doing exactly the same as you and there is someone watching the activity upforming with it and if you break the pattern the system might manipulate things so the system wins and all dudes loses, but you can take a little from system earning without calling too much attention.
If you are operating with an STP broker like me, in theory the liquidity provider doe not know who is trading nor the stop levels, only your broker and as long as the overall accounts of the brokers clients makes money for the provider i guess it won’t be any trouble. But what if STP broker gets corrupted by the providers bribing and toghether they act as a MM broker, well if you do the same as most trader do they will manipulate prices to suck off all SL and you still can profit if you break the common pattern.
Ok, let’s say both broker and provider are honest, the provider still can hunt you down, they can among all anonymus transactions watch your position size and your exits by SL can unveil you. Let’s say for some reason you are in a losing streak, the precise SL level can show a pattern that they can use for their own trades, but if i close my trades in random loss levels i might look like another scalper without luck. I am not saying this might be true but just in case. If i were a provider i wouldn’t try to hunt down a recurrent pattern but i would use this information to profit my own accoiunt.
That’s all I need to know that you will still able to trade even a 100 pip loss because in your previous post you stated “for me SL is a catastrophic exit when things goes out of control.”
