Peter,
Thanks for the kind words.
My stops are always mental. I was just re-reading one of my books on Swing Trading last night and this very subject was discussed. It was highly recommended that one get in the habit of using mental stops because it causes you to take responsibility for your trades. It forces you to get in the habit of making decisions at a time when decisions need to be made.
Have you ever had a trade go against you and you find yourself trying to justify the price movement instead of selling? I know I have.
Have you ever had a trade go against you and the first thing you want to do is find out if there's any news out as opposed to selling? I know I have.
These reactions are a result of poor selling discipline. These reactions, in most cases, cause us to lose more investing capital. In too many cases, we tend to focus on the one or two times that breaking our rules worked for us. The subconscious loves to justify our mistakes and makes us feel better when we went against prudence and won. All this does is instill bad habits and those bad habits will come back to haunt us.
Stops are nothing more than insurance. They are there to help us keep enough capital to stay in the game. There will be times when we were stopped out and the stock immediately turned around, it happened to me yesterday with TMR. That isn't the main concern though. The main concern is to minimize risk. There wasn't any way of knowing TMR was going to turn around. As I was dealing with the here and now, I had to make a decision. The decision was to activate my mental stop. I did so without hesitation, without remorse and without regret. If a new buy setup appears, I'll get back in.
Since you don't have full access to all of the trading session, you can set your mental stops based on the closing price. In most cases, this is the prudent thing to do anyway, especially if you use daily candlesticks as part of your analysis. There is a trade off for this approach. Sometimes you'll lose more than you would if you sold intraday. Other times you'll be saved from the shake and bake of the specialists like what happened yesterday with TMR. It all has to do with time frames.
If you enter a trade off a daily chart, you exit off a daily chart. Therefore, you would focus on the last hour of trading. In my case, I entered my trade with TMR off an intraday chart. Therefore, I made my exit off the same chart when the intraday price broke below the intraday momentum bands.
One of the biggest mistakes in trading is in not dancing with the date you brought to the dance. In other words, you trade in the time frame that made you enter the trade. Hourly to hourly, daily to daily, weekly to weekly. You don't change time frames once you are in the trade because when you change time frames, you change the character of the indicators.
That doesn't mean that if you look at an hourly chart to fine tune an entry off the daily, you have to exit off the hourly. Your entry is actually based off the daily.
So, to make a long story short, use mental stops and be sure to enforce them. Base your stops on the time frame in which you entered the trade. And if you leave money on the table after you activate a stop, fuhgeddaboutit. Focus on the buy setup that provided you with a profit and use that setup to find more opportunities.
dabum |
