The goal of every day trader is to enter high probability trades and profit as the price increases. Most traders use a group of indicators, oscillators, and price action to determine the exact set up that will maximize their potential for a winning trade. But there are two outcomes of any trade; the goal is profit, but things don't always turn out the way a trader has it planned. There are no 100% trades, nothing is guaranteed. Even the best trade setups have the potential to lose money. In short, trading is all about probability.
What do you do when your well-planned trade starts to head south?
Let's say a trade you frequently use has a 70% success rate. I would take this trade every time I got a chance. Why? The odds are in your favor, though there are few trades that have a 70% success rate. The other side of the argument is the 30% failure rate. In normal trading, then, three out of every 10 trades are going to result in a loss. Losing trades are an integral component of every day trading system and learning how to lose is an essential skill for all traders.
Prior to every trade set up, I make a subjective assessment of the level of risk I am willing to assume if I take a given trade. One component of that risk assessment is where I will place my stops. Typically I use Welles Wilder's Average True Range to help me to determine the potential profit in a given trade. Though past market action is not a guaranteed indicator of the potential in a trade, it gives me a good idea what the current market mood might be. I do not like to risk more than 16 ticks on any trade and usually inclined to use 8 to 12 ticks as a good stop loss points. I am relatively risk-averse and running long stops is not a practice in which I engage.
Let's start with a hypothetical day trade. I have taken the high success rate trade set up. I go long. Unfortunately, the market price begins to swing the wrong direction. I really liked the set up prior to executing the trade and feel the market will go in the right direction. But it doesn't. I have set up with 12 ticks as my stop loss and the current market price is -8 ticks below my entry price. Worse yet, I am still convinced the trade will eventually reverse and move upward, but it looks like it's gone up breakthrough my stop of -12 ticks before it changes direction.
What should I do?
The answer to this question is simple and unequivocal. I never move my stops to accommodate a losing trade. Ever. This is a hard and fast rule in my trading methodology. I understand probability, and accept the potential risk and reward inherent in every trade. Even on a high probability trade that may reverse direction, I do not move my stops. Why? If the trade is already negative, why would I potentially increase my risk exposure by moving my stops to accommodate the negative price action? I have no real knowledge that the trade will reverse and start climbing in price. The truth is simple, I want the trade to move upward because I will profit. Wanting a trade to move upward as opposed to knowing the trade will move upward are two very different realities. One of the most important principles in my personal trading methodology is understanding the difference between fact and fiction. In other words, I let the price hit my stop and I am out of the trade with a loss. I generally give high probability setups every chance to reverse to a positive outcome, but I will not increase my risk exposure based upon my emotional attachment to a trade.
I think learning to lose the proper way is an extremely important concept to understand. In my experience, I have watched day traders repeatedly move stops to accommodate adverse price direction. The result is fairly predictable, the day trader ends up losing more money than he or she initially intended. The result of moving stops to accommodate trades increases your risk exposure. I like to stick with my initial risk assessment and let the trade play out. Sometimes it's easier said than done, almost painful, but I never move my stops.
What do you do when your well-planned trade starts to head south?
Let's say a trade you frequently use has a 70% success rate. I would take this trade every time I got a chance. Why? The odds are in your favor, though there are few trades that have a 70% success rate. The other side of the argument is the 30% failure rate. In normal trading, then, three out of every 10 trades are going to result in a loss. Losing trades are an integral component of every day trading system and learning how to lose is an essential skill for all traders.
Prior to every trade set up, I make a subjective assessment of the level of risk I am willing to assume if I take a given trade. One component of that risk assessment is where I will place my stops. Typically I use Welles Wilder's Average True Range to help me to determine the potential profit in a given trade. Though past market action is not a guaranteed indicator of the potential in a trade, it gives me a good idea what the current market mood might be. I do not like to risk more than 16 ticks on any trade and usually inclined to use 8 to 12 ticks as a good stop loss points. I am relatively risk-averse and running long stops is not a practice in which I engage.
Let's start with a hypothetical day trade. I have taken the high success rate trade set up. I go long. Unfortunately, the market price begins to swing the wrong direction. I really liked the set up prior to executing the trade and feel the market will go in the right direction. But it doesn't. I have set up with 12 ticks as my stop loss and the current market price is -8 ticks below my entry price. Worse yet, I am still convinced the trade will eventually reverse and move upward, but it looks like it's gone up breakthrough my stop of -12 ticks before it changes direction.
What should I do?
The answer to this question is simple and unequivocal. I never move my stops to accommodate a losing trade. Ever. This is a hard and fast rule in my trading methodology. I understand probability, and accept the potential risk and reward inherent in every trade. Even on a high probability trade that may reverse direction, I do not move my stops. Why? If the trade is already negative, why would I potentially increase my risk exposure by moving my stops to accommodate the negative price action? I have no real knowledge that the trade will reverse and start climbing in price. The truth is simple, I want the trade to move upward because I will profit. Wanting a trade to move upward as opposed to knowing the trade will move upward are two very different realities. One of the most important principles in my personal trading methodology is understanding the difference between fact and fiction. In other words, I let the price hit my stop and I am out of the trade with a loss. I generally give high probability setups every chance to reverse to a positive outcome, but I will not increase my risk exposure based upon my emotional attachment to a trade.
I think learning to lose the proper way is an extremely important concept to understand. In my experience, I have watched day traders repeatedly move stops to accommodate adverse price direction. The result is fairly predictable, the day trader ends up losing more money than he or she initially intended. The result of moving stops to accommodate trades increases your risk exposure. I like to stick with my initial risk assessment and let the trade play out. Sometimes it's easier said than done, almost painful, but I never move my stops.