My recent ABLE trade was a good reminder for me (even though I didn’t need it) of why I enter market-held stops, as opposed to mental stops, immediately after entering a trade. I know that I’m not going to be right on every trade so my job is to lose as little money as possible when I’m wrong — which is often. Thankfully with that ABLE trade I got stopped out before I even knew what happened and, more important, before my loss became large. (I was short ABLE and gave back about 2% in the first couple of minutes of the day. The stock rallied about 20% in the first 45 minutes of the day.)
I’m never happy about taking losses but small losses are much easier to deal with than large ones. If I didn’t take my predetermined stop just after the open yesterday I could have easily seen that trade ruining my day and probably even ruining my week. Instead of being out of the trade and focusing on other opportunities I would have spent the whole day beating myself up and watching every tick of ABLE hoping that it would reverse. The stop allowed me to move on and I was able to recoup my small loss during the day.
It’s often been said that people would rather be right than make money. The two are not mutually exclusive by any means but focusing on being right can wipe you out of trading with a quickness. I’m sure the average person would feel better trading a system that had a 90% win rate instead of a system that had a 40% win rate since they could be right 90% of the time. But depending on the relative size of the winning and losing trades the 40% system could be more profitable. In fact, you could be right 90% of the time and still lose money overall! Of course the key is keeping losses small and winning big. Deciding on where you’re wrong before you enter the trade and placing the stop loss order is critical in keeping those losing trades small.
P.S. Barry Ritholtz has written about this a couple of times in his Apprenticed Investor series.
Also, I see that Dave Landry talks about this topic in this week’s swing trading lesson:
Forget About Being Right. Simple Things You Can Do To Help Ensure Your Success
Wednesday June 1, 6:05 pm ET
By Dave LandryIn this week’s audio/visual presentation, Dave covers current market conditions, follows up on last week’s presentation on how to properly enter stocks, and continues his theme of how swing trades can occasionally turn into bigger picture plays. In his psychology segment, Dave discusses simple techniques that you can use to help fight the natural urge to be right. He also discusses that sometimes the market is a bad teacher. Finally, he answers questions about patterns and individual stocks. http://live.tradingmarkets.com/p64024917
Hi Mike,
When you place a stop, do you use a limit or a market order. As I undertsand a limit is ok but if the stock moves fast it can blow by your limit.
Also when you physically place a stop loss order, do you feel sometimes they stop you out on purpose?
Where is the link on Dave Landry’s site to all the trading lessons, or do you need to be a member?
Thanks!
Glenn,
I almost never use limit orders and especially not on stops. Traders/market makers/specialists are know to go hunting for stops. It’s just part of the game.
I don’t know about the link you asked about.