My input on ‘stop psychology’……
Firstly, when we start out our aim is to make money not lose it. Remember, the markets that the snake oil salesmen show us are easy to trade, just look at those clear V shaped changes in trend and just look how long those trend runs are….oh my…$4.00 to $18.50 in 6 weeks, just imagine what my five grand would look like now if I caught that one ! We are not preparing ourselves for loss and defeat, we smell victory and month on month double digit percentage growth of our capital. Why do we need a stop ? Surely stops are for the people who expect a loss ?
First point – Our mindset is one of positive outlook, we expect to win, that is why we are playing.
Secondly, after having played the game a short while we notice that we are losing money for some reason. Not only are our losses from bad trading mounting but our transaction costs are also quite high. The cost of moving in and out of deals is a weight on our minds. If only I could open a deep discount account and move away from this internet broker who charges £20 minimum each way on trades. Psychologically we feel that we are not getting a ‘fair ride’ for our money, and what is worse is, it costs more money in fees when we get stopped out.
Second point – We view stops negatively, the word ‘stop’ reminds us of loss and of costs, the thought is a painful one and one we would avoid like an electric fence.
Thirdly – We notice that when we place a stop, the market retraces to our stop, takes us out, and then reverses. Because we perceive the market as some kind of beast or animal we start to feel like we are being stalked. The way around this is to either widen the stop from the outset or take the stop off just before it is hit. Of course, the market being the market, it allows us to get away with such an indiscretion when we first try it, a form of beginners luck no doubt.
Third point – We see stops as flexible, this helps lessen the pain caused by my second point. It means we stay on the ride a little longer and we notice that we initially have less losing trades because positions retrace after touching our initial stop level. We feel that we are better managing the concept of loss. Of course the BIG loser, which will undo 3 times the value of our good work, is only a few trades away.
Fourthly – Through shear mathematical genius, we work out that if we buy a second multiple at our initial stop level, the stock will only have to retrace half as much before we go into profit. Again, a cruel twist of fate allows us to pull off our cunning scam on several occasions. Stocks always bounce at some point, averaging the losing trade is our new ‘tool’ which will help us.
Fourth point – When we are new, the market seems to let us get away with things which we later learn to be untrue.
Fifthly- I opened a position this morning for a scalp, it’s gone against me and I have tried all my ‘tricks’ (ie moving stops / cost averaging etc). I may keep it as a position trade. Classic phrase guys. I have lost count of the number of times new traders have come out with this one.
Fifth point – We remove stops altogether. We justify this to ourselves because we are now running a ‘position trade’ and not a short term scalp. We are now living in hope. We are not in control of the trade, in fact, the trade is in control of us. We are over committed and there is a risk of having to provide further margin.
Good Morning,
Steve.
