when do i say 'i was wrong'

[rockablogger]

hello all

i have noticed a big flaw in my trading plan, and wanted to get some ideas, .. i trade often intraday and once i get into a trade i tend to hold onto it too long. This can work in my favour sometimes as if im short the market will eventually drift south after scaring me for a good few hours... or north if im long. However on big market moves in any one direction i take a real bruising, and the more painful it gets the more reluctant i am to get rid of it. An example is the recent move down in the price of Gold. I went long when prices dropped back expecting yet another record high, but we all know what happend and it got bad to worse.. right now im short the DAX and im watching it playing with me...I need a Plan.

 

[Rossini]

I will move this to first steps, but if I where you I wouldn't trade until I had a plan (even a bad plan is better then no plan). Do one of two things, place a Stop Loss at the point that you think that the trade is wrong and then risk a fixed % of your account. Or some other exit strategy e.g. time based, indicator based etc....

 

[tomorton]

Rossini's right - Plan the trade, trade the plan. When you see the entry point, you should also be able to make out the two exits - one in profit, the other the stop-loss. Once you're in the trade, always respect these two points if you have already rationally set them. Later on, when no money is at risk, you can calmly review wether the TA you use actually supports, in general, tighter stop-losses or wider profit targets (maybe even vice versa).

 

[rockablogger]

thanks both for your advise/comments,
.. i have tried placing stop losses a while back and it was uncanny as how often i was taken out of the market before it continued to head in the previously desired direction. As im here all the time and can monitor the trades iv found it useful to not set stop losses to avoid these 'spikes'. for this reason Im thinking of trying the idea about giving the market a certain number of bars to prove me right, ... otherwise, .. im out. although im not sure how many bars and what timescale is the best....is this a method you have tried and failed or .... comments further to the problems i faced with stop losses.?

 

[tomorton]

I also avoid setting automatic stops because of the spikes - uness I am going to be away from home etc. But I do respect the 'mental' stops I have identified.

I sometimes get so bored with a sideways range on a position that I close it, but more so that I can put the funds into a better oportunity than anything significantly weak in the original position. Sometimes, though, even sideways bars can indicate a favourable TA pattern confirming the original likely direction of breakout, its just the timing that proved premature. Number of bars might prove to be trial and error.

 

[Rossini]

You are talking about a time based stop. This is fine, but the exact time you give a trade to work is totally dependant on your goals, no one will be able to help you with that.

Another option (that I use in some types of trading) is a disaster stop set well above/below the entry. The idea is that you exit using discretion or some other means well before the DSL is hit. However if the market gaps/moves violently or you have a power cut etc... then the DSL will save your account.

A DSL should never be relied upon to exit a losing trade though.

 

[cycletracker]

Hi rockaglogger,

The key is to use technical stops, not arbitrary price-based stops. A technical stop is determined by first analyzing support and resistance levels in the timeframe you are trading then setting your stop just beyond those levels. For long trades, you should place your stop just under the previous level of support and for short trades you should place your stop just above the previous level of resistance. High risk/reward trades are created by entering close to a technically significant stop price when the stock has sufficient room to move in the profitable direction.

You are most likely getting stopped out because you are entering your trades too far into the move and are setting your stop in a technically insignificant location.

Hope this is useful.

Andrew

 

[tomorton]

Andrew has it right - the market will tell you where is the right place to get out. Its common to hear new traders, who have learned some rules, say things that indicate they have decided on how much money they want out of the trade, then putting the stop at a position that would risk half this take, because they have heard that risk:reward should be 1:2. The market doesn't work like this.

 

[cycletracker]

To add to what tomorton said, rather than decide how much you want to make on the trade, you should set a maximum stop loss dollar amount. In other words, limit your losses. Successful trading comes from controlling your losses so you don't devastate your account. Then, when you determine your stop level for a trade, you can calculate the position size to use.

See my website for free position sizing tools: http://www.cycletracker.com.

I also post a lot of my trades on the site with entry, stop, and exit prices. When you see a small black line underneath a candle, that is my stop level. Unlike most other trading blogs I've seen, I post both my winners and losers. I don't usually post scratches or near scratches.

 

[rockablogger]

i had some fantastic success in the last few months, using the method of selling at resistance and buying at support levels just before Dubai and the better than expected results from the US, this completely caught me offguard, .... and i realised it was even quicker to loose it, looking back at what i did wrong makes me feel really stupid, ... in an attempt to not take a loss i kept hold of most of my positions which quickly became big losses, basically i had long positions aswell as short positions and generally if i wasnt right the first time, id just wait with the open positions untill the market started trending in that direction and so id get out with either good profits, small profits or no profits.... very few losses. eventually i couldnt stand the big drawdown and got out with big losses, .... just as the market started moving in favour..... so looking back and analizing the trades, ..my biggest mistake, or rather the only only mistake i can see is the faliure to cut losses. I will begin use mental stops just above / below support resistance levels as suggested, .. this will get me out of a lot more trades with losses, .. but should avoid big drawdowns...

 

[tomorton]

Yep, we've all been there at some stage.

 

[tomorton]

On a more constructive note, for beginners, and I include myself in this bracket, the aim of the early game is not to make a lot of money, it is to not lose a lot of money. Stops should be set by TA at the nearest possible point to your entry that would prove that you were more likely wrong than right when you entered, again on TA, and that what you thought would happen is probably not going to. The stop point itself will need to be modified a little to allow for spreads (which also open out wider at times) and a little for normal (i.e. not exceptional) market volatility. Whether your stop is automated or manual, always respect your stop: in fact, when price starts to run towards it, start scaling out.

 

[cycletracker]

@rockablogger - If you have the discipline to adhere to your mental stops, more power to you. On lower intraday timeframes though, using mental stops is *to me* a bit like driving a car without a seat belt on and telling yourself you'll put it on at the last second before a collision occurs. Of course, this is usually not practical because you probably won't have the time to react, or you'll have a "deer in the headlights" moment and freeze up.

@tomorton - Agreed, except for the scaling out part. Your stop is your line in the sand. By placing a stop and share sizing accordingly you've already decided you're comfortable losing that much money; you've limited your risk to what you're willing to lose. Depending on the type of setup you're trading, most trades won't immediately go your way. They'll bounce around a little and then take off, sometimes coming within a couple pennies from hitting your stop.

Now, if you have a time stop in your plan (which I do), then I'd say sure. When that triggers start peeling some off or tighten up your hard stop. But I think it's important to respect the decision you've made to place a stop somewhere. Otherwise, you'll always be second guessing yourself.

This is merely my experience though. Everyone must find their comfort zone and develop their own style...I also consider myself beginning trader.

Andrew

 

[tomorton]

I admit Andrew its a fine point whether you stick all the way down to your stop or start scaling out halfway there. Sometimes I do one, sometimes the other, sometimes one works, sometimes the other, so I guess I haven't even fully convinced myself.

Most often, if price gets most of the way towards my stop it sail right on through. But maybe that says more about the places where I put my stops and the issues I trade. I also think very early beginners should get used to planning trades ahead and accepting losses, and scaling out helps that education and builds discipline.

At the end of the day, yes, you must set a stop where you're happy you should be out not in, and you must size your position such that if you hit the stop with a full position, your account won't be too badly damaged. So yes OK why not let events take their course?

On planning - does anyone know any charting software that allows the user to create a blank space at the right edge and draw in a number of possible price patterns in the future? And derive their MAs and other indicators? It certainly might help beginners plan more thoroughly.

 

[cycletracker]

Good points tomorton.

On charting software, TradeStation can do what you're describing. I've used it for just this purpose in the past and found it quite useful. I'll try to find some time to post a quick tutorial on my website later this evening. Will post here when it's up.

Andrew

 

[Black Swan]

Stops should be set by TA at the nearest possible point to your entry that would prove that you were more likely wrong than right when you entered, again on TA, and that what you thought would happen is probably not going to. The stop point itself will need to be modified a little to allow for spreads (which also open out wider at times) and a little for normal (i.e. not exceptional) market volatility. Whether your stop is automated or manual, always respect your stop: in fact, when price starts to run towards it, start scaling out.

spot on...

 

[rockablogger]

hello newbie here again, .... as a background id like to point out that i tried trading a while back , at the time i used to work stuff out and then ring my order in to my broker in the US,, so it was a while ago, and lost my trading account and gave up. iv only just got back involved and seemed to be quite happy with the results untill a few weeks ago, but i have a nigling question which could warrent its own thread however iv started so ill finsh, ... two of the people who have given what i would would consider as sound advise have mentioned either in jest or for real that they comsider themselves as beginers so far as trading is concerened. My question is simple but it would do a great deal to help me if i could just have a straight up answer. At times like this i seriously being to question whether there are any of us traders who consistanly make money via trading. Is there anyone that has given up there full time job because they are now earning double what they earned before and keeping the job seriously hinders there earning ability?, .... or are we all still learning and proving to be easy fodder for the professionals, who rely on our lack of imformation and experience to fill there opposite positions... im not looking for specific cash figures, .. just some bottom line, ... 'this was the best descision i made, i could never have bought my villa in spain without it' .... or ..." " .. you may be a bit taken back by this, but im sure its a question which has crossed many peoples minds, and is one which is coming back to haunt me.

 

[cycletracker]

@tomorton - I apologize. I misstated my earlier message. I meant to say NinjaTrader can do what you're describing. I primarily use TradeStation, which is probably why I typed that, but as far as I know TradeStation cannot do this.

I didn't have time to put together a tutorial tonight, but I will do one soon.

Sorry 'bout that.

Andrew

 

[tomorton]

A fair question rockablogger - My trading for my first 6 months brought in double my salary. Though a much better trader now, I'm still in employment.

 

[Black Swan]

Never,

Rocka, there are many many traders on 'ere who make a v. decent living out of trading, be it SB, DMA, or a mixture combined with longer term investment and or position trading...

I would advise that if you can keep your job and trade successfully (on longer term TFs) then IMO you've got it cracked. However, I'd also suggest that it takes twice, perhaps three times as long to become proficient if trading on a part time basis...

In answer to your original question I am now never "wrong", seriously never. I stick to my plan, if the market moves in a way that my probability based trading strat. didn't work then I wasn't wrong, neither was the market. Quite simply the billions of folk constantly pulling the market in opposite directions exerted enough power in the opposite direction to which I believed probable...