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Cut Losses Short

  
  Education
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Cut losses short is the sister rule to the let profit run, and is usually just as difficult to implement. In the same way that profitability comes from a few large winning trades, capital preservation comes from avoiding the few large losers that the market will toss your way each year. Setting a maximum loss point before you enter the trade so you know before-hand approximately how much you are risking on this particular position is relatively straightforward. You simply need to have a exit price that says to you this trade is a loser and I will exit before it gets any bigger. Due to gaps at the open, or limit moves in futures we can never be 100%
certain that we can get out with our maximum loss, but simply having the rules, and always sticking to it will save us from the nasty trades that just keep on going and going against our position until we have lost more than many winning trades can make back.

If you have a losing position that is at you maximum loss point, just get out. Do not hope that it will turn around. Given that trades are either winners or losers, and this one is shouting Loser at you, the chances that it will turn around and become a large winner is tiny. Why risk any more money on this losing trade, when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding the position and hoping it will go back your way. Even if it did do this, the mental energy and negative feelings from holding the losing position are not worth it. Always stick to your rules and exit a position if it hits your stop point.

Thought from Peter Brandt

  
  Education
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“The irony is that in real time, I never fully feel like I am trading successfully because I am always aiming for performance that is higher than I am attaining. I am generally my own worst critic and constantly set the bar higher than my last jump. The result is that it is difficult for me to crow about the “successes” of my trading career.

But, to the degree I have been consistently successful through the years, I believe it is due to three factors. First, I am obsessed with risk management. I spend more time and mental energy focusing on risk control protocols than on anything else. Managing losses and losing periods is my number one priority. If I can just tread water during the inevitable tough periods, sooner or later I will find myself caught in a favorable tide.

Second, my trading approach is overly simple by design. The result is that I know with as much certainty as is possible with a discretionary approach when there is a trade entry in my program. It does not mean that the trade will be profitable – only that the trade is there.

Third, I have tried to engage market speculation systematically, breaking down the process of trading into every conceivable component. What flows from this is an understanding of what components of trading are controllable and measurable and what components are uncontrollable. By the way, whether the next trade or series of trades will be profitable is not a controllable factor. Once a trader learns this — it is then possible to remove ego from the equation.” – Peter Brandt

Why do only 5% of the traders who day-trade end up successful?

  
  Education
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5percentTwo reasons – #1) Many just want an indicator that is going to reveal the market to them and it is too competitive for that to work.

#2) The vast majority don’t approach the challenge in a way that will work. To a large degree, this isn’t the trader’s fault because most do what they have been taught by scores of “experts”.

Here is what will work. Guaranteed.

1. Never forget that the only thing you want to do is predict that others will buy higher or sell lower in your timeframe.

2. Settle on a strategy (and set of tactics) that suits your personality and thinking patterns.

3. Plan to use your judgment in the midst of making decision and entering trades! You are not a robot and you will never become one. Your brain is going to kick-in with its built-in facility for decision making in uncertain situations. In other words, you won’t be able to stop it from making judgments and compelling you to act so… work with it.

4. Learn to optimize that judgment through simplicity, practice, keeping records and knowing your feelings and emotions.

5. Manage your Psychological Capital (Mental Energy) more carefully than you manage your trades.

The money will follow. Your brain will work, your pattern recognition will work and your plan (a realistic one) will indeed be realized.

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