Print this, read this, reread this, MANY times, until it sinks in.
Who am I talking to?
Myself, you, and every short term trader.
Without this rule, you and I will not suceed.
Copied from another thread.........
Stop Losses& Risk
I've heard a lot of confusion lately from new traders regarding stop-losses...many of
the new investing books recommend 8-10%; you must remember this is for
INVESTOR's, not traders. What i have been using with good success is a formula put
forth by Dr. Alexander Elder in his excellent book, "Trading for a living" where he
suggests that you limit your losses to 1-2% of your entire trading stake, before margin,
PER TRADE. If you keep to this formula, your portfolio can take the inevitable string
of hits without serious damage. So if your trading w/$10,000 capital, the largest hit you
can take is two hundred bucks, including commission. This naturally brings up the size
of your position in relation to your stop loss. You must decide whether to limit your
losses consistantly to an eighth, and hence trade larger positions, with a willingness to
re-enter the trade; or build in your tolerance for Market noise (normal price
fluctuations, or MM's shaking the tree) by taking smaller positions, with say a half point
stop-loss built in.
Another point on stop-losses: they must be mental, if your trading Nasdaq; if you place
a physical stop-loss, a MM will drop his price for an instant to trigger your stop, and
steal your money...guaranteed.
On a losing streak? A good practice is to quit trading for a day or two and paper trade
if you take three hits in a row; if you're down 8-10%, quit for the month and stick to
paper trading the rest of the month. Beware of overtrading: if you're up a point or two
for the day...take the rest of the day off! Get away from the screen...go play. I have
found myself overtrading after making some good plays....and i get over confident and
take on more risk than i normally would, and would have fared much better if i had quit
while i was ahead. For some reason, often we find a reason to gamble instead of trade
when we're up, with the rationale that it's ok to put the money you just made at risk.
Thats a losers headset over time.
A nice trick is to try cutting your number of trades in half for a week... you may be
surprised at the results. If you are patient and very selective in your trades, your odd's
and confidence increase dramatically. If you cannot wait patiently for the market to
offer a solid play, and/or are trading for the rush...you probably should not be trading.
In a macabre, but what i think to be an accurate analogy: govenment statistics show
that during the Vietnam war, American infantry burnt up 200,000 rounds to get a single
body count....whereas the trained sniper averaged 1.3 bullets per kill.
Hope this helps someone.
-Coyoti |
