Friday, April 26, 2013

A failed trade

I often post charts of decent trending stocks, which have produced profits, but I also put up here charts of trades that don't go to plan. Bear in mind that historically my win percentage has been in the region of 50%, so I win as often as I lose. In some of those trades, such as this one, I've had profits that have evaporated, resulting in a scratched, breakeven result.

In the chart below, you will see that, in the course of a week, this UK stock initially looked like it was going to be a winner, but the price action over the last couple of days has meant that my stop was triggered.

Of course, there is no way of knowing whether price will reverse back to the upside over the next few sessions, or will continue downwards. Stops are used to protect a traders' capital, which is his lifeblood. If price action does not act as intended, and the stop level is breached, then the trade should be closed, no questions asked.

We also never know which set up will result in a winning or a losing trade, or whether the stock will produce a gap through our intended stop level on unexpected news, which could cause damage to our equity. Therefore, prudent risk control is exercised at all times.

In this particular instance, price broke out seemingly in a convincing fashion and the open profit almost reached twice my initial risk, only to fall as quickly as it rose, and briefly went below the breakout level on an intra-day basis. This triggered my stop. Yes, a bit frustrating, but it's not a big deal in the overall scheme of things. I'm relaxed about being stopped out of positions. Where a trade hasn't worked out as I hoped, it brings me one trade closer to a winning trade - may be a big one. I have that confidence as I know what my win rate has remained pretty constant over a number of years. At the end of the day, I've protected my capital, and will move on to another set up.

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