A typical example of a losing trade cut short

Here is a typical set up which I opened a position last week and cut taking the small loss the following day.

There is nothing out of the ordinary in the set up on this stock - there has been some recent price strength, a pattern of higher highs and higher lows emerging, combined with a consolidation period where volatility (as shown by my Volatility Factor indicator) has contracted.

The breakout stop comes to the rescue (again)

In the second half of 2011, and in particular the last quarter, I was experiencing a frustrating time. The markets were volatile, and I suffered a number of trades where price initially broke out in my favour, only to sharply reverse and end up generating losses around a full -1R. This was because those trades had not been open a sufficient length of time for my trailing stop to start moving from its initial price level.

The trade that really stung was a long position in a small UK stock in November 2011. After initiating the trade, my open profits reached about +5R after only three days, yet my initial stop had not moved, based on the rules I used at the time. Then, price did a sharp about-turn, and three sessions later, I was stopped out for a full -1R loss.

After this happened, I retreated to cash and took a break to think.

Stress testing yourself and your method - sowing the seeds of future success

These days, I always try to look at things from a positive point of view. Where others can only see the negatives or downside, I try to look for the potential upside or opportunities which may arise.

Attaining that mental state was not easy to achieve. In my early days as a trader, I struggled to keep my emotions and approach to risk under control - particularly when things went wrong. Things would get flung across the room, combined with a lot of negative talk and shouting, which can easily damage your self esteem. To change from a negative to a positive mindset took a lot of effort, but it has been crucial in helping me get to where I am today.

Overtrading - with Bruce Kovner

In my own opinion, overtrading (trading too large positions relative to your equity) is the no.1 reason that inexperienced traders tend to blow up their accounts. Following up from my two recent posts about this subject, here is a short extract from Bruce Kovner's interview with Jack Schwager in Market Wizards talking about this very topic. Kovner has achieved incredible results in his trading career, so his views should be listened to:

A traders' development

The vast majority of successful traders have suffered knocks in the early stages of their trading career, even to the point of blowing up one (or more) of their trading accounts. What they have done though is changed their thought processes and perceptions about the market, as well as their methodology and risk control.

Trend following - on stocks???

This week I finally got round to start reading Jack Schwager's Stock Market Wizards, the third book in his series on successful traders. My dog-eared copy of the original Market Wizards helped shape me as a trader, after reading the interviews with Ed Seykota and Larry Hite, two prominent and famous trend followers. Even now I can recite those interviews almost word for word, and still have the CD version of those two interviews in my car.

Jack Schwager speaks

A trend following trader friend of mine sent me the link for this talk given by Jack Schwager, author of Market Wizards. My dog-eared copy of Market Wizards is a treasure trove that I keep returning to on a regular basis. Even though a lot of the traders interviewed are not trend followers, their insights and thoughts can easily be adapted, or are just as relevant, to trend following.

This talk highlights some of the aspects you should consider when thinking about your own trading and the plan that you follow, regardless of whether you are a trend follower or not. And you will find that a lot of these points are mentioned in my e-book, as well as in earlier posts on here, as they are critical to my own trend following system and my own trading mindset. The video is about 50 minutes long, but is well worth watching. Enjoy.