STOP LOSS. HOW TO TUNE ONESELF TO KEEP IT
During my trading career, I've seen endless variations of stories about stops. There are two things that strike you as remarkable when you think of it.
The first thing is that there are practically no traders that would deny the significance of stops as a vital element of trading. Yet, plenty of traders fail to keep stops.
The second is that a majority of the lectures, classes and articles about stops are usually targeted to convince traders in the necessity of stop losses, showing them different ways what a disaster awaits them for not keeping stops. Wouldn't work. After this kind of lecture, the audience applauds, says "thank you, now we are cured finally", only to blow another stop in a day or two.
It's obvious that the reason for not keeping a stop is not a lack of awareness about their necessity. It is an incorrect mindset that is the real reason. Therefore, let's agree this is not kindergarten. We are grown-ups here. We will skip the part of proving the importance of stops altogether. Let's assume everyone here knows it. We want to be successful traders and are willing to do what it takes. Thus, let's talk about HOW to tune oneself in order to make stopping out a natural part of the game.
I want to start with the very definition of loss. When you pay tuition for college, is it a loss? It isn't if you get a good job based on the education you paid for. It is a loss if you abandoned your diploma. What if you paid for education much more than a new job can compensate you for? It's still not a loss but you paid too much for your education.
This is exactly what happens in trading. If you bought a stock on a certain criteria, the trade went against you and you took your stop, was it a loss? It isn't a loss if you revised the criteria and avoided the same mistake next time. It is a loss if you repeat this mistake over and over again. If you failed to keep a proper stop and wind up with a much bigger stop than you should, then you paid too much for the lesson.
However, unlike the example with college, you were given the opportunity to assign the price to education and you have deliberately chosen to pay the higher price! This is the first element of your self-tuning. Do not pay more than you could! The market is an eternal educator but it's kind enough to let you pay for education as much as you elect to. Education is on sale when the stock hits your predetermined stop level. It won't be on sale in a minute so why would you wait?
The second element we've discussed earlier. I will just indicate it with no deep details. It's thinking of money when in a trade, counting what you lose or gain with each tick. The market doesn't care if you lose or how much you lose. Focusing on money just take you further from the emotional balance while clouding your judgement. Monitor what the market does, not how your account is affected. I say this because the subject of your job is market movements. That's what you have to react on.
The third element deserves more attention. We already discussed it in the class "Switches in thinking". However, it is still very relevant to this topic and I want to go deeper into it.
If you come to the market with the notion that in order to win, you have to know what the market does every future minute or hour, then how will you perceive yourself when the market does the opposite of what you expected? As a fool? As a loser?
Nobody wants to be a fool or a loser. That's where your ego takes over immediately. It tries to save you from this unpleasant feeling. The next step naturally will be to think "I am not a loser. Those sellers are. The stock will reverse in a minute and they will be crying. I will be celebrating."
See how the ego takes you farther from the territory making you believe your map is correct?
There is a way to avoid this deadly spiral. My suggestion is to change the original belief you approach the market with. Let's look at your thinking process if you come to the market with the notion that "I don't have to know what market does next. It's enough to know where the higher probability is." What I DO have to know is "what will I do in any scenario that market offers."
Thinking like this:
1. You already accepted and assumed the stop loss possibility. It no longer comes as an unpleasant surprise for you. This is a perfect continuation from Chris's previous class on which he says that gamblers create risks while speculators assume them.
2. You admitted from the very beginning that the market is bigger than you and is not to be controlled or predicted by you. Your ego will be quiet as nothing triggers its intervention.
3. You don't feel like a fool when the market goes against you. Why would you feel like that if you never thought you are able to outsmart the market anyway?
4. You don't feel like a loser when the market goes against you. Why would you feel like that if you never thought that a winner has to be right every time?
See how changing the original belief reverses the way you feel and act? Realize and accept the fact that the market is an ocean. Swim with it, use its current, its ebb and flow. Don't think that you can change the direction of the current or that you can know all the currents there are. You find out that the current takes you in an undesirable direction and you swim out of it and look for another one, instead of waiting for it to reverse.
The next very important element is perceiving your trading as a whole. Many great active traders at the end of the day can't even list the stocks they played, while newbies remember each detail of each trade for weeks and months. Newer traders perceive each trade as unique and outstanding. If the trade fails, it feels like a disaster. If the trade works out it feels like a huge victory. When such a significance is assigned to each given trade, it becomes hard to accept the stop. Accept that your account can not go up with each trade taken as no stock goes straight up. It has its retreats. The trend is what matters. If your account is on an uptrend, what else do you need? Oh yes, you need one more thing. As shallow pullbacks as possible. But that's exactly what stop loss does. It limits the pullbacks! Start to look at your trading as a whole instead of looking at each trade, and you will feel compelled to apply a stop loss in order to limit the retreat. +1/2, +5/8, -1/4, +3/8, -1/8, +1 1/4, -3/16 is an uptrend with three shallow pullbacks stopped early. +1/2, +5/8, -1, +3/8, -1 1/2, +1 1/4, - 1 is not an uptrend. It's an erratic super-volatile jumping around line. You don't want to play any stock that moves this way and you don't want your account to look like this.
There are also elements of responsibility and being in control that have to do with this topic, but let me skip them as we discussed them to a great extent in previous classes. If you reread those you will see a direct connection. Instead, I would like to take one more step ahead deepening our ability of self-control. I believe that everything we discussed can already make a major switch if applied by a trader. Still, I want to offer you an even more detailed approach.
There are certain tricks you can use in order to correct your behavior. In one of the interviews with great traders that I found was a confession of a woman who had an incredible discipline in applying the stop. When asked how she managed to achieve it she said, "I am a very religious person. I believe God doesn't want me to lose money. I might upset Him if I do. I apply a tight stop loss and I am in accordance with what I believe in."
Find your motivation, your trigger, your valuable asset you don't want to jeopardize. It could be something different for each of us. For example, maybe use your family for whom you want to prosper. Stop loss is your way to protect the prosperity of your family. It could be the car of your dreams. Stop loss takes you closer to the amount of money you need to buy it. It could be your mortgage, etc.
I won't go further into citing examples. It's more of a personal ground. Define your major asset to protect by stop loss and protect this asset religiously. Reread this entire class as many times as you need to adopt this mindset. Reread it every time you find yourself hesitating to take your loss. Be creative with your mindset, find all the tricks you can think of to make yourself loss cutting machine. The market will reward you immensely.
Vadym |
