The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk by Andrew Abraham

Author:Andrew Abraham [Abraham, Andrew]
Language: eng
Format: epub
Tags: Business & Economics, Investments & Securities, E-Commerce, Commodities, Online Trading
ISBN: 9781118417638
Publisher: John Wiley & Sons
Published: 2012-11-30T07:08:55+00:00

■ The Exact Elements of Risk Management

The elements of risk management relate to one of the most important topics in trading: stop-loss orders. A stop-loss order or money management stop is a protective stop that needs to be placed immediately upon entry. There are those who think they are comfortable with “mental stops.” However, in the thick of trading these “mental stops” are not activated. I have heard the excuse that if I place my stop, traders on the floor will run the stop. I find this an excuse for blaming. Blaming does not make you money and the market does not care for excuses. In the heat of the moment the mental stop order must be placed and I have seen traders freeze. They wait, they rationalize, and they convince themselves with a myriad of reasons why not to take the trade. This is one of the most common issues I have seen traders blow up. I do not think you want to be one of the 90 percenters (failed traders). Just one bad trade can implode a trading account that took years to build. Mental stop-loss orders are an accident waiting to happen.

The only time I would agree that mental stops might be used is if a large number of shares or contracts are purchased or sold. However, this is not reality for most readers, and I strongly suggest once your orders are filled you put in your protective stop. The stop loss is a protective stop you have placed in the market if your open trades reaches or exceeds this stop level. The stop-loss order's purpose is to protect you against large losses. It is prudent to take a small loss. The stop loss is only an attempt to mitigate a loss to a preset amount. However, in the real world there exist gaps and limit days, which can and will exceed your stop-loss order. There are absolutely no guarantees with stop-loss orders. Large losses can be detrimental to both one's financial account as well as emotional makeup.

I promise you there will be many times your stop losses are hit and the market completely turns around again. This is reality. The only way to avoid situations like this is not to trade. If you get stopped out, you need the mental fortitude to put the trade back on if you get a signal. If you don't put the trade back on, you will feel terrible if this trade becomes the trade of the year. You need to be consistent and accept the risks and that you will have countless losses.

Worse than trying to put in mental stops, there are traders who believe they do not need to use stops at all. This is the scariest of all. These nonstop traders believe they have a winning strategy or system. If they have a winning technique, why would they bother? These nonstop traders soon wake up after a devastating loss in which they let a small loss compound into a nightmare.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.