Monday, October 20, 2014

A double edged sword - Part 2!

It never ceases to amaze me how, whenever you think about overriding your entry or exit rules, things have a way of working out to prove that, by sticking with your method (whatever it is), things generally work out better.

I talked here about being stopped out on a number of short positions last week due to the markets rallying off its lows.

On Friday I was stopped out of a short trade on a European stock for a -0.57R loss, as the breakout I was trading had failed. Yes, it was frustrating at the time, but the particular stop methodology I use is for a reason - to ensure that any loss incurred is as small as possible, and to eliminate the possibility of that loss getting any bigger.

As it happens, this particular stock price gapped up on today's open, and has kept moving up throughout the day. This was despite the European markets moving in the opposite direction.  If I had ignored my own rules, which are very aggressive in terms of cutting losing trades, and had closed the position on today's open, then the loss would have been in the region of -1.2R. And if I had waited until today's close, hoping for price to move back in the direction I wanted, then the loss incurred would have grown to -2.26R.

As the old saying goes "Your first loss is your best loss". So, while Friday was annoying as a number of stocks acted in this manner, by adhering to my rules then I was able to keep those losses as small as possible. Of course, those trades could have reversed back in my favour, but that can be seen as succumbing to hope, which is not a valid strategy. Doing what I did kept as much of my equity intact as possible, as well as keeping me on an emotional even keel. A valuable and timely reminder!

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