Selling Strategies - Setting A Stop Loss

However, when we make the decision to jump into the muddy waters of the stock market, its always a good idea to have a life jacket ready, just in case. Sometimes the best way of lowering exposure to risk is not to invest at all!

Trailing stop loss. So, how to best protect yourself when the markets disagree with your due diligence? We all have stories of that "must have" "can't lose" stock that looking back, we didn't really need to buy, and it definitely lost.

Its important to understand the psychology of investing. When we make money, there is instant euphoria. When we start to lose money, there is a sudden "deer caught in the headlights" type of emotion, which makes us unable to do the right thing. We fear that the moment we sell, will be the moment that it starts to rebound. Not only do we fear that we will be that guy who sold at the low of the day, but that we will miss out on untold fortunes because we got out too early.

While this happens, more often than not, a small loss turns into a much bigger loss. Remember, a 40% loss started off as a 5% loss.

So what is the best stop loss strategy? Well, we happen to have 2. One simple, one a little more complicated, but possibly more effective and capital saving.

The first strategy is called a "trailing stop loss". Its simple and effective. We're going to add a small twist to it. A traditional trailing stop loss simply means that you set a percentage that you are willing to lose. For example, if you purchase 1000 shares of ABC at $5/share, you could set a stop loss at 10%. This means that if the stock dips below 10% of your purchase price ($5 - 10% = $4.50), you're out of the market and no longer risking capital. If the share price moves higher, you would set your stop loss at 10% below the closing price. If ABC moves to $5.50, you would set your stop loss at $4.95. If the stock drops below that price, you're out.

By setting your stop loss at the time of your purchase, you are taking the emotion out of investing. Specifically, you are taking out the "deer caught in the headlights" emotion. This will save you grief and will save you money. If your stock moves like you think it will, you can lock in your gains automatically.

Our twist to this strategy though, is to first establish the dollar amount that initial stop loss is worth, and let that dictate what your stop loss will be.

Given the same example as above, your initial stop loss would be $4.50. You would only be risking $0.50 per share or $500. This represents the most you are willing to lose, regardless of which way the investment goes.

If the share price moves to $7.00, instead of setting your stop loss at $6.30, (thus risking $0.70 or $700 of your money), you would set your stop loss at $6.50, which risks the same $500 you were initially willing to lose when you first started.

This little twist helps you keep more of your profitable investments. Why put more profits at risk?

The second stop loss strategy is, although a little more complicated, will protect more of your money.

While we would love to take credit for this strategy, we found it when reading Chart Trading by Darryl Guppy. This strategy starts by looking at your overall capital, not the amount of the specific investment. For example, if you had $20 000 in your investment account, you could trade 51 times if each time you invested you put 2% of your total capital at risk.

While 2% doesn't sound like a lot, lets have a look at an example. Given your investment account has $20 000 in it and you only want to put 2% of it at risk, you would be willing to risk $400 per trade. This ensures that you will have 51 chances to get it right before you run out of money.

Where you set your stop loss is basically the point where you are risking $400. Given our initial example, your stop loss would be at $4.60. If the price moves from $5 to below $4.60, you have lost $400. What if you purchased 2000 shares at the same $5? Your stop loss would be then set to $4.80. Anything below that, and you have risked more than $400. If you think that you want a deeper stop loss, then you would purchase fewer shares. The idea is simple: you never risk more than the same amount per trade.

As the price increases, you then change the amount of your stop loss accordingly. If the stock hits $7, you would set your stop loss at $6.60.

This will lower the number of chances you have at getting it right. Your 10% stop loss would put $1000 at risk. However, what if you purchased 2000 shares at $5 each?

Given our initial stop loss strategy, assuming you lost $500 each trade, you could lose approximately 40 times before you ran out of money.

On the other hand, if the market disagrees with you, you can still keep the majority of your money! This way, when your hard work pays off, you'll appreciate it more. Its much better to think about the amount you are prepared to lose.

Many investors think of the ways they are going to spend their profits before they are made. Its up to you how much money you are preparing to risk.

Forex Trading Psychology

First fatal psychological mistake.

In such situation, most Forex traders seem fearless, not fearing making losses and only worry that others are making profit and worrying that they must enter or lose money. As new financial data is published, most Forex traders will rush to be first to enter the market. Following blindly is the most Forex traders' fatal psychological weakness.

There are many Forex traders who watch the Forex chart closely, and will enter a market when the chart show a steep movement. They don't even take time to understand what are the forces causing movement. It may be too late when they finally realize that it is a false alarm because they are already in the losing position.

When it comes to trading, one of the most neglected important subjects are those dealing with trading psychology. Most traders spend lots of time trying to find that perfect system. But having a good operating system is just a small part of the game. It is very important to have a system that well suits the trader, but it is as important as having a money management plan, or to understand all the psychology barriers that will affect the trading decisions. In order to succeed in this business, there must be an equalness between all important aspects of trading.

When you lose a trade, what is the first thought that pops up in your mind? It would probably be, "There must be something wrong with my system", or "I knew it, I shouldn't have taken this trade".

FOREX trading is pure volatility and 80% of all trades do not last more than 2-3 days. Most of them become daytrades. It is easy to accept that conditions can and will change in a heartbeat, rendering most trade plans obsolete.

One principle is about cutting your losses at an early stage. Some traders want to believe that their losses might do well after a lenghty waiting time. More than likely the market moves against these non-profitable positions and make them lose hundred of points. Even if they rise again they will be unprofitable. Do not be caught up in the thought that every trade should be profitable. If you can profit from half the number of your trades you are on the right track. If you would like to get even and profit if only half of your trades are winners is to allow your winners to run and to minimize your losses.

Another principle is playing smart by not letting your emotions rule in trading. Be objective with your decisions. While in the market,be sensitive enough to see the factors that may have influenced the changes that worked against the original analysis you had worked out.

Expect the unexpected,both good and bad. Understand these happings, be prepared, and take the appropriate actions. A good psychology plan takes into consideration that you can not predict what is going to happen in the market.

Unless you're trading in short positions, only increase your position when prices goes up, not down. Generally, when a price starts to move it usually continues in that direction for a while.

How to Handle a Losing Streak:
|
Plus, your trading account won't be drawn down so quickly.If you trade less you may discover why you are not successful. Follow those fewer trades more closely and document your success or failures more easily. If you are trading several currency markets and not having any success, cut back to trading one or two markets. Don't overtrade.

Research those programs and your money will probaly go further. There are many automatic Forex Trading Programs available.

Trading Problems - Maintaining Focus

get rid of the thought and think something else.? I once heard a statement by Rebecca Fine of www.scienceofgettingrich.net that says something along the lines of ?If what you?re thinking about isn?t something that you want to have happen in the next three minutes?

While that?s a great way to live your whole life, and I certainly try to do so, it equally applies to the process of trading, specifically ensuring that we maintain focus during the conduct of our analysis.

Maintaining focus can be difficult. Not only will you face distractions from external sources, such as the phone ringing right during a prime setup, or your partner asking for a lightbulb to be changed, or your children asking for help with their homework, but you also face internal distractions from your negative fear-based trading mindset. These internal distractions may be less obvious to the novice trader, but the results can be devastating for your profitability.

If you have not yet mastered your negative fear-based trading psychology, then you are going to face never ending distractions that divert your focus from the job at hand ? consistent implementation of your trading plan.

Regardless of how these fears manifest within your trading ? complacency, boredom, doubt, procrastination, denial ? they will lead only to inconsistent and unprofessional application of your trading plan. And that cannot lead to long term consistent profits.

How do we deal with this negative fear-based trading psychology? Well, that subject cannot be addressed in one article. I?m currently working on a complete home-study program on the mastery of trading psychology, which will provide you with the tools, strategies and techniques for overcoming these issues.

However in the meantime this statement from Ms Fine provides you with a really simple tool to add to your trading toolkit, to ensure you maintain focus during your analysis despite any internal or external distractions.

The process is similar for both long term traders and short term traders. But let?s talk short term first, because that?s primarily what I do.

As a day trader, your success comes from consistent application of your trading plan. Success comes from conducting analysis on a regular basis throughout the trading session, either on the close of each candle or on a price-alert as price reaches a certain preset level, and then acting appropriately to enter, manage or exit your trades.

What do you need to do to ensure that your focus remains on the process of trading?

Here?s what I do:

1.???Document the analysis and decision making process. Have clearly defined actionable steps that you need to carry out every candle to reach your decision to hold, enter, exit, or adjust your stop loss or profit targets.

2.???Set an alarm to go off prior to every candle. If I trade off 5 minute charts, I have an alarm go off 30 seconds before the close of each candle to allow me to pause and check my thoughts. If my thoughts are not related to the objective analysis of the market and the correct implementation of my plan, then they?re discarded. My focus is then returned to the documented trading process.

This works regardless of timeframe. If I was trading off one hour charts, I?d set an alarm to activate just prior to the close of each one hour candle. If I was trading off one minute charts, I?d still set an alarm to go off just before the close of each one minute candle. If I was just waiting for a price setup at a particular price level, and had no intentions of trading until price hit that level, then I?d just set an alarm for price hitting that target.

Setting an alarm for timeframes of 15 minutes upwards is certainly a great idea, as you won?t necessarily be sitting watching the screen the whole time in-between candles. However, you might ask whether it?s really necessary for very short timeframes, such as one minute charts. The fact is though, that it is necessary, and it does work. It is amazing how often I find my mind wandering elsewhere. More often than not, it?s thinking about something unrelated to my trading plan. The alarm interrupts this thought pattern, and allows a return of thought and focus to what?s important.

Try it, and if you find yourself suddenly wondering what the MACD shows, and it?s not part of your plan, discard that thought ? it?s irrelevant to this trade. If you find yourself suddenly thinking that you need to win this next trade to get back to breakeven, discard that thought ? it?s irrelevant to this trade. If you find yourself wondering where you should go next holidays, discard the thought. Once again, it?s irrelevant. Interrupt any unwanted thoughts, and think something else that will help you trade your plan in a consistent manner.

Oh, and so that you don?t burn out through having an alarm go off every minute for an eight hour trading session, let?s add a step 3:

3.???If you are trading a very short timeframe, program breaks into your session, to get away from the markets. Relax, recharge and refresh yourself, so that you can keep up this pace.

For longer term traders, let?s say someone trading off daily charts, the problems are the same. In your case, you have a process that needs to be followed to come up with your decisions to enter a trade, exit a trade, or modify target or stop levels.

In this case, you still need to implement step one, documented actionable steps that allow for consistent application of your plan. Consider something like a checklist, or flowchart.

You can probably dispense with the alarms, as you only need to complete the process once. However for longer term traders, I?d recommend including statements within your documented process to remind you to check your thoughts, and return them to the process of trading.

Perhaps prefix every step with a documented reminder such as, ?I am a professional trader, and a professional trader trades their plan in a consistent manner?. Then, the act of commencing each step of your nightly analysis, will serve as a regular interrupt to unwanted thoughts, and a return of your focus to the job at hand.

This way, there?s no need to be going and checking other indicators for further confirmation, when it?s not part of your plan. There?s no need to be checking other news sources for further justification of your decisions, when it?s not part of your plan. There?s no need to be emailing or phoning your friends to seek their thoughts on a particular stock or chart, when it?s not part of your documented process. These are actions of people who have lost focus, and whose trading destiny is being led by their fear and greed.

As a professional trader, you simply follow your steps. And use your alarms, or documented checklist steps, to interrupt any unwanted thoughts, and return your focus to the business of trading.

So, if you don?t already have a checklist or flowchart set up for all actions that must be carried out during your analysis, then create one. And place in it reminders to monitor your thoughts, and reject anything that is unrelated to the current task at hand.

And if you day trade, set up an alarm, either price based if you simply wait for price to hit certain levels before making trading decisions, or a countdown timer if your decisions are time-based. Then reject any thoughts that are unrelated to the process of trading. And follow your plan with consistency.

Wishing you happy, and focused, trading,

Lance Beggs.
?
All Rights Reserved. www.yourtradingcoach.com. Lance Beggs. Copyright 2008.

?