Wednesday, March 27, 2013

Cutting losses

When the stop level in one of my positions is breached, and the position closed, it is removed from my screen, and consigned to history. The reasons as to why the trade ended up generating a loss are unimportant to me, unless it is as a result of either an error actioning the trade, or an error in stop placement. I simply log them in my trading records, and move on. I also know that, given the historical performance of the system, every losing trade brings me closer to a winning one - maybe a big winner.

This kind of attitude I believe is important, as you do not want anger or resentment to cloud your judgement when trading. It is vital that you stay on an emotional even keel, and in particular stay focused on maintaining your discipline, especially with regard to risk and position sizing.

One thing I do notice is that those stocks in which I suffered losses re-appear on my scans a few sessions later, but this time being flagged up as potentially breaking out in the opposite direction. Some stocks do just whipsaw around, without going anywhere - others try to breakout in the direction I traded, failed, and then turn round and develop a trend in the opposite direction. This re-assures me in that what I am doing is right - losing positions are cut ruthlessly, keeping the red ink to an absolute minimum. Having this attitude means you can eliminate the temptation to override the exit signal, in the 'hope' that the trade will swing back in your favour.

It is only as a result of doing this that I can generate the profits I do, while keeping drawdowns to the minimum. It's a well worn maxim, but it really does come down to cutting losses, and letting profits run.

This ability to accept losses, and to move and focus on potential new positions, is key when utilising a trend following strategy.

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