Warning this is going to be blunt.. Don’t be offended.
By Stealth Surf
I always have my stop in the market. Always. I never baby sit a loser. Will it bounce? if it bounces I’ll sell maybe, maybe not I’ll just watch it a bit longer. I can’t look for any new trades as I have to watch these losers…
Yes sometimes it will be a flush and bounce straight back up but soon after it will usually be back down again as the trend was broken. The odd one will flush out and then reverse and never look back. This is trading. You can’t win them all. The trouble comes when you try to save them all. Trading successfully involves losers. Maybe more than half your trades will be losers.
What Do I Do
I put my stops in a break of trend. If price goes below that level it would be making a lower low and the trend would be bearish and the pattern broken. When a trend is broken it usually leads to choppy directionless price action until the next trend forms.
Having your stop in the market has the advantage of being high in the order queue. On small caps its easy to be top of the queue so if the share gaps down you get filled quickly before the crazy swings start. This has saved me more than once in the last few years. I see it all the time on social media. If only I sold straight away. I am that person who sells straight away. I’m out. Damage has been done to the trend. Would I buy this gap down on a profit warning? No Never. So why would I want to still be in the trade after it? I don’t. I’m out.
The End of Day Stop
Now I know some people use an end of day close below their stop area and it works for them as they have the trading psychology to close that trade. A lot more people don’t have that psychology so I will do a little section on the math of winning for those who don’t take that loser quick enough.
When I look back through all my trading results very few have bounced back and made a good profit. Just for the math lets say 1 in 10 would have made money but I know from my results its much lower than that. Most trades that do have a bounce after hitting my stop area end up nothing trades.
If your stop takes you out at 1R it actually costs you a bit more as you have trading costs and usually a small amount of slippage involved also. The odds are skewed against you already.
What is R? R is £Risk per trade at your stop loss as a percent of account.
If you have a £100,000 account and risk 1% per trade 1R would be £1000.
What is expectancy? Expectancy is the average R of all winning and losing trades.
Your £ per trade average return on every £ risked.
Lets say those nine trades that you stopped out on the end of day close by some miracle only cost an average of 0.2R between them. 1.8R in total. Straight away the one winner has to move 3R to pay for all the extra slippage on the losers and that’s just to break even. You are also gambling that none of the other nine trades will drop like a stone and take you for a few more R. That one trade that turns into a winner now needs to move more than 1.2R to be break even and another 1.8R to pay for the extra slippage on the losers.
That’s 3R in total. So your asking a trade that is underperforming to get off its lazy backside and run 3R and then another 2R or more so you can make a profit as well.
Another scenario is allowing for a bit of slippage in your position sizing but this means trading less shares thus skewing the math of winning against yourself as you have less shares running on all your winners. Now if you add to your winners your onto something but it still won’t change the fact that there’s a bit of gambling going on with extra slippage thus turning a risk 1 to make 2 or more into a risk 1.2 or more to make 2 or more but the 2 or more target is now further away with the wider setup parameters.
The quicker you cut your losers the better your expectancy will be.
If your stop is getting hit more often than your expectancy can handle then it could be an early warning to indicate a change in the market trend but its more likely that your entry criteria is flawed.
I always put my stop in an area that would result in a break in trend on the timeframe I am trading. If the share spikes through my stop and puts in a lower low but then recovers and puts in a higher low I will take the trade again. This will usually take a week or more and another better trade could and usually does come along before that happens. The last thing I want to do is baby sit a share that’s broke trend but I’m hoping will reverse. If I’m long a share because it traded above a key level it should not reverse and trade back below the lows where my stop is.
You can only achieve positive expectancy if you can cut losers quickly. Letting opinions override the basic math of making money will at best cause you to underperform and at worst lose money hand over fist with the other 90% of losers.
A good exercise to do with all your open positions would be to explain why you are in those positions. If your answer is “it traded to new highs so I’ve trailed my stop to the previous low” This would tell me you have a trading plan and you are following that plan. If the word hoping creeps into your explanation you either have no plan or you ignored your plan. You are gambling. You are part of the nine out of every ten traders on social media saying things like “when the next RNS is released this micro cap will rocket” or “its gone down so far now its great value” No its not. It can go down 100% from any price. It can go to zero.
We have been in a raging bull market for many years now and now more than ever people refuse to believe that the market can go down. Well let me tell you it can and it can go as far down as its gone up. I’m hearing all the value guys start to call AIM shares long term holds. AIM long term! There’s been a few but not many. I’m hearing traders change their names to long term investors. I could go on forever but one thing all these people have in common is their inability to cut a loser. The louder they scream on social media the more pain they are in. If the market does turn bearish for a couple of years they will be back to break even in about 2019 if lucky. More likely they will sell into maximum pain at the bottom.
We just had a major break of trend in all the markets around the world. It could be a false alarm but at best we will get volatility for the near future. Those traders or investors who hold a portfolio of losers through a sell off and turn them back into winners will be totally out of the game when the next bear market does come around. They will get chewed up and spat out. This is the markets job. Maximum pain to 90% of people who play.
Don’t be a loser. Honor your stops.