Planning Your Losses - Planning Your Losses Brett N....

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Planning Your Losses Brett N. Steenbarger (April 14, 2002) – I received dozens of emails following my recent chatroom class with Linda Raschke. The question I heard most often concerned the setting of stops. Specifically, traders were interested in learning how I set my stops, especially with trades that lasted an average of less than 30 minutes. I believe that a key to successful trading is learning how to become comfortable with taking a loss. We know that markets, while not perfectly efficient, are largely so; complete predictability is never going to be attained by mortal traders. That makes trading a bit like hitting in baseball, where one can achieve a high degree of expertise, even while making frequent outs. Losing traders often bring a measure of perfectionism to their work. They equate a good trading day with a profitable day. No, no, no! A good trading day is one in which you have followed your well-researched plan with focus and discipline. Good trading days, over time, will generate profits. But the uncertainty of the markets means that even the best laid trading plans can go awry. In the short-run, you cannot control your profitability. You can control whether or not you have good trading days, which will generate profits over the long haul— if you have adequately researched your strategies. Broken clocks are right twice daily and even unresearched strategies implemented impulsively can occasionally yield profits. Those might seem like good trading days, but in reality, they reinforce the very qualities associated with failure. The perfectionistic trader equates taking a loss with experiencing failure. The loss thus sets up a rash of negative internal dialogues and subsequent trades born of frustration. A more realistic trader realizes that there is a degree of uncertainty built into the market and that losses are simply a cost of doing business. The goal is to limit these losses as effectively as possible, not will them away or becoming preoccupied with them. Stop Loss Scheme #1: Price-Based In this article, I will cover three basic stop-loss strategies: price-based, time- based, and indicator-based. All of these can be rehearsed in advance to make the taking of losses more automatic (i.e., less emotional). Most traders are familiar with price-based stops (though not all adhere to them!).
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This note was uploaded on 08/11/2009 for the course FINANCE Fixed Inco taught by Professor Proflim during the Three '09 term at University of Adelaide.

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Planning Your Losses - Planning Your Losses Brett N....

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