Futures
Trading 8
Stopping Yourself
by Malcolm Robinson
I read on a bulletin board a trader's comment
that on his first outing trading the E-Mini S&P 500 he lost on each of his trades. He
noted though, that had he had a wider stop each of his trades would have been profitable
and that therefore he would be trading with a wider stop in future. A wider stop on these
particular trades may have worked, but this does not mean that a wider stop per se is the
answer. In fact, everyday there is the possibility of any given trade going into profit if
given enough room, but that does not a wise strategy make. This trader was a seller in a
market that subsequently went down; hence he could see that had he given his position a
bit more room he would have made a handsome profit. Unless this trader has the ability to
always accurately predict the direction of the market he is going to experience days where
he is wrong and the market goes against him, in which case his potential for loss with
wider stops is greater.
When deciding an appropriate amount to risk
on any trade (i.e. size of stop) a trader has to consider more than the potential profit
on a particular trade on a particular day. What this trader was saying to himself was 'If
I had a 3 point stop instead of a 1 point stop, I could have made 15 points; therefore I
will always use a 3 point stop!' Partly what he was saying to himself was 'I was right!'
But he wasn't right; in the time frame of his trades and within the risk limit of those
trades he was wrong, his timing was off and that is what he needs to work on.
He is also making two assumptions:
That having a bigger stop and therefore
bigger open losses will not affect his trading composure and performance (how do you feel
if you are risking £10?… £100?… £1000?… £10,000?)
That he would have held on to his
profitable trade until he gets an exit signal (it is easy to assume after the event that
we would have got out at the very best moment)
The truth is we are all much weaker than we
would like to assume. The biggest challenge to profitable trading is sticking to our own
self-imposed loss limits, be they on a per-day or a per-trade basis. What this trader did
on this day was stick to his limits, which is highly commendable; he was just having
difficulty accepting his results. No one likes losing money and no one like being wrong,
but to be successful in trading we have to be accepting of both.
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Futures Markets
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Copyright © 2002. Malcolm E Robinson. All rights
reserved.
