Friday, September 20, 2013

Taking the rough with the smooth

Earlier this week the markets in the US made all time highs, following the latest announcements from the Federal Reserve. You may have thought this would lead to a surge in profits on existing long positions, but not so. 

The markets and their behaviour ensure you keep humble, test your mettle, and (if you want to stay in the game) practicing rigid risk control.

Over the last week, I've closed one winning trade, against six losing positions. Hell, one of the losses was a trade triggered this morning, before promptly reversing and ending up being a full 1R loss, all in the space of a couple of hours. Frustrating certainly, but all part of the game. 

You have to accept that things like this can and do happen. What's the alternative - getting angry, increasing position size to get the money back in quick time?

One of the other trades taken this week triggered its updated stop for a small loss on the open this morning. However, I was sure glad that I bit the bullet and honoured the stop, as the stock in question ended up falling over 8% on the day. 

Giving it some leeway, in the hope it would turn back in my favour, would have meant ending up with either a bigger loss taken, or a big red number on my screen staring at me. Who's to say it won't fall further next week?

Regardless of your own methodology, the easiest way to stay in the game over the long haul is to keep your losses as small as possible. If you want to gain access to the potential rewards that trading can bring, you have to accept the risk. If you don't want to suffer losses, then don't trade.

Even though the ratio of closed losers to winners for the week was 6:1, my cash equity is still showing a small increase on the week. How was this? By simply keeping the losses as small as possible, and letting the profits run. And, in the words of trading legend Ed Seykota and The Whipsaw Song "One good trend pays for them all".

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