Protecting Your ASSests
Trading Plan to me includes managing trading capital as well as creating an entry and exit plan that I can follow consistently. Plan is more of an on paper thing whereas System implies more of a programmed software thing (whether I develop it or buy it from someone else) that outputs trading signals on entries, exits, stops and so on.
I don't like the idea of buying programmed software as I don't know whether it would work or not. And, I probably wouldn't follow it to the letter. Why would anyone sell their puffed up money-making machine if it's that darn good to begin with. caveat emptor
The most important part of any good trading plan includes managing trading capital. If I run out of trading capital, I'm one of those seagulls you see on its back and not moving.
Since I'm not a Warren Buffett wanabee whose #1 rule is don't take losses. I know I will be taking losses along the way and have to plan for them.
So I can take small losses or I can take big losses. One big loss can put me out of the game altogether. I choose the small losses. How do I do that consistently?
By using stops either actual placed stops or mental stops. Actually placing an online stop will be better for me than a mental one unless I am doing a day or short swing trade while watching the live chart and executing the mental stop without hesitating.
Before setting an actual or mental stop, I have to determine how much of my trading capital I want to use for any given trade. Next, my plan has to give an entry price and exit price, a dollar risk and a stop loss price. These will be programmed in so when I put in the data, if it doesn't meet my criteria I won't take the trade.
There are several kinds of stops based on a fixed dollar amount or a percentage of trading capital. Timed stops can be used with either of the above. Trailing stops are used to protect profits and are mentioned below. There are probably other kinds of stops that I am not aware of.
On any give trade, I prefer using percentage of trading capital available stops over dollar amount fixed stops as my trading capital will go a lot farther that way.
Using a timed stop within a actual placed or mental stop means if hasn't hit green by some set time ranging from 30-120 minutes, I'm out with a limit or market order.
So far, I've focused only on loss protection because that is more than half the equation in remaining in the stock trading business.
The other part, of course, is taking or protecting profits. Here again stops whether actual or mental are important. By having an exit price that takes in account the risk, can automatically take me out of a trade with an online stop. If using a timed mental stop and watching it closely, I can let it run if it still looks good on the chart and have a market order ready to press the button without thinking once the chart signal a change in direction. I can never out-guess the market. Trailing stops are used to lock-in profits which I can move as the market moves in the right direction.
On any day trade, a profit of say 5% or more should not go into a loss (unless there is some sudden bad news during the day) since I will have moved the initial protective stop up to at least a break even price. (I keep two of my past trades showing in my account where the loss has been over 70%. (The actual dollar amount is small since I wanted to make some trades and knew very little about trading at the time.) I don't expect them to ever come back, in fact, I hope they don't as they are in my face every day and that pounds in a good lesson to Seagull--now don't let that happen again or someone is going to clip my wings for good.)
Last edited by seagull339; 08-15-2007 at 11:00 AM.
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