Think Like A Trader Blog

Tuesday, 13 October 2015

Protect Yourself First and Foremost

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This is an unscheduled post. I usually post up blog pieces on a Monday and a Thursday, but I wanted to touch on something I get asked about quite frequently. I often get emails or messages through the Facebook page that go something like this:

''I keep losing money when I’m trading. I have a good plan and the back testing showed that it is profitable. But when I trade live I make mistakes and let the position run against me and I end up with lots of losses. How do you deal with this?''

It’s very common. And it’s surprisingly easy to combat. Use your stop. That’s what it is there for. It’s a safety net. And on the lower timeframes especially, it is incredibly useful. Until you’re very confident in your trading and know you can control your decision making and emotions, use your stop like a watchful instructor on your shoulder, always there to yank you out of trouble.

How do you do this? Get the stop to breakeven early. On markets with low spreads (1 – 2 points/pips) you can often bring your stop to breakeven anywhere between 5 and 8 points/pips into profit. This is exactly what I used to do when I was learning – well, after I had suffered a lot of losses for the reasons mentioned in the message above!
The downside is that you will get stopped at breakeven more than is strictly necessary. But this far outweighs taking lots of full losses. And trust me, you can still be very profitable using this method. It protects you and your capital, which is the most important part in trading.

After that, consider removing your profits in stages. Perhaps close 50% of your position when you get to 10 points/pips, or 15, 20, whatever. This allows you a certain detachment if the market then starts heading for your breakeven stop, because you’ve already locked in some profit.

Trade cautiously when you’re learning and you’ll be trading long term.

I hope this helps and I hope you’re having a great trading week!

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