Morning Ron,
This could be an interesting discussion - thanks for starting it up.
I have been in positions that have moved 20-30% to the downside shortly after I have taken them only to have them move 50% to the upside in a few days. If I was to sell every time a stock moved to the downside, I would eventually stop myself out of money where I couldn't buy anything without putting in new money.
Based on what I've been reading from your comments, can the following observations be made:
- you mentioned that you gave back a large chunk of profits last year, so I'm assuming that your strategy (your 'program') works better in a bullish market
- you primarily trade on the long side?
- you are looking for big moves in most every position?
I have 2 sons that traded by the percentages, both to the upside an the downside, only to stop themselves out of money.
Stops in themselves are not a complete answer, risk management involves sizing a position based on the risk presented and your how large the position is as compared to your available trading capital. New traders very frequently "overbet".
New traders also tend to believe they need to be "right" much more often than not, in order to be profitable. This sets up a dangerous bias in a trader, since it means they are bound to allow for larger losses - because they have a bias that they are right more often than not.
This bias is going to be particularly deadly when a major trend changes - such as the tech market direction changing last spring. Reading through the threads on SI back then we see a lot of moaning about how "TA doesn't work any more".
Well since technical analysis is all about measurement, and since measurement doesn't change - a cup of sugar is a cup of sugar today, yesterday and tomorrow - then its not technical analysis that has stopped working, it was the traders use of the tools that suddenly became inappropriate given the change in trend in the market.
Bias within these traders kept them continually trading their old strategies - mostly on the long side for the vast majority of 'traders' - because their methods provided no clear method of detecting the change of trend in the market or their stocks.
Oops, I'm getting off topic here a bit.
I have been in positions that have moved 20-30% to the downside shortly after I have taken them only to have them move 50% to the upside in a few days. If I was to sell every time a stock moved to the downside, I would eventually stop myself out of money
Aside from perhaps evaluating how you allocate funds and determine risk, let me put forward another potential tool for your arsenal. I'm going to assume you go long more than short but the technique works well irrespective. Just reverse it ;)
1. Your analysis suggests that its time to enter a position
2. You place fairly tight stops below
3. If it moves up from there, terrific. Move your stops to break even as quickly as you can; how you then manage your profit is a subject for much more discussion
4. If it moves down and stops you out, that also is terrific. By placing a very tight stop you have limited your loss and can live to fight another day. When you are stopped out you need to evaluate your analysis - was it flawed? Or is it noise? Sometimes its difficult to tell, and if we can't tell, then IMO its best not to be in the position.
5. If your review of your analysis suggests that the stock is still worthy of trading long, then consider placing buy stops at some appropriate level just above the down bars. Thus should the move against you be a temporary 'dnoise' move, you will be stopped back into a position **when it moves up**.
That last point is most important - you are allowing the stock to **prove** to you that it wants to go up. Once stopped in, you can place a sell stop just below the bar that took you into the trade (i.e. the prior down bar's low).
I agree with you an Dick about MM but so is IM. If your IM is good then your MM will follow.;-))))))))
What's "IM" ? |
