All Entries Tagged With: "P&L"

Hard Stops vs. Mental Stops

August 20, 2009 at 10:15 am

When I’m swing trading, I prefer to place stop and target orders via bracket orders.  That means I’ve got pending orders which will cancel out the other side based upon what gets executed first. I’ve got a hard stop in place just in case of an adverse move in price, and I’ve got a limit order in case of a favorable move.

This set-it-and-forget-it style of trading works well for me on the multi-day timeframe.  First, I don’t need to watch every tick.  I can trust that my orders are doing the job for me, because generally those stop and target levels are several percentage points away.  Second, it helps to keep me from micro-managing trades.  I don’t get so consumed with the intraday chart that I abort my original game plan.  That’s good.

But when it comes to intraday plays, or day trades, I often times will take a slightly different approach by using a mental stop.  There are a few reasons for this:

1. I’m watching the price action closely and developing a feel for the move that’s taking place.  I will know the area where I’ll plan to exit the trade before getting in, but in the first few minutes I may not have a specific, hard number that I’m ready to commit to.  That’s simply part of tape reading on a trade that may only last minutes.

2. Because I’m watching the price action, by default I’m at the PC.  That means I’m able to blow out of the trade instantly when I realize the time has come that I’d rather have the cash than the shares.

3. Since my intraday timeframe is about minutes or hours, it’s often a bit tougher to continually place and cancel orders for the same trade as it progresses.  Ideally, the stock is moving in the intended direction and I’m eyeballing areas on the chart where I’ll need to book some gains or begin to lighten up (or even exit entirely).  Those levels change continually based upon the momentum of the stock, so I often times defer to sort of a “mental trailing stop” whenever that’s the case.

4. Fortunately, I’ve never struggled with blowing stops, so I can trust myself to bail on a trade when it’s time to.  And again, I know going into the trade the general area where I’ll get out, so even if that’s crossed right away then my decision is made.  My struggle generally lies with staying with big winners and allowing them to become huge winners, but that’s a topic for another discussion.

Which One is Right For You?

The answer to this depends on your personal style, and some real honesty is required on your part with this one.  But it is rather simple.

If your tendency is to blow mental stops, then set hard stops in your trading platform and leave them alone.  End of discussion. It’s for your own good.

If you prefer mental stops, insert support or resistance levels on your chart (literally draw them) so that you’ll at all times have a visual representation of where your trade stands and if the time to bail out is approaching. I often set red support levels and green resistance levels as sell and buy markers for trades. Whatever you do, be consistent and don’t hesitate to kick that trade out the door when it stops behaving.

Bottom line:  if you know deep down inside that you lack the discipline to cut a losing trade when the time comes, put a hard stop in place. And if your problem is simply staying in a winning trade when you know you should, consider scaling out on the way up.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

More on Recovering from Trading Losses

August 17, 2009 at 6:44 am

Ever been downright frustrated with your trading?

If you’ve been a trader for any length of time, I’m sure you have.  There can be stretches of disappointments during which it feels like getting on the right side of a move might not ever again happen. Your account shrinks and your confidence takes hit after hit, causing you to question your desire to continue playing the game.

If it sounds like I’ve been there, it’s because I have been.  Multiple times.  Every time I’ve hated it just as much as the first time, but every time I’ve emerged as a better trader.  No pain, no gain!

Dealing With Drawdowns

I think it’s a good exercise for every trader to know their thresholds, and to determine just what you’re willing to lose during a poor trading stretch.  That’s not to say you plan on it, but rather you designate some amounts, which if lost, will prompt you to make some immediate adjustments.

That might be a dollar amount subtracted from your account highs, or it might be how many consecutive losing trades you’ll endure when a drawdown occurs.  Once those flags have been raised, it’s time to shift the routine.

It doesn’t mean you entirely abandon an approach which has proven to work for you over time, but rather that you install some safety rails for yourself before the damage becomes far more difficult to repair.

Short-Term Steps for Long-Term Survival

If you’ve suffered from a recent drawdown, it’s important that you take a few steps to get back on track – both in the near term and for the long haul.

In the near term, it’s crucial to preserve whatever confidence you have left.  Remember, that’s your psychological capital, and it must be protected.  Take a few days away from trading, maybe a week, and just clear your head.  This may sound obvious, but stepping away is the best way to stop losing! Discouragement leads to some poor decisions in trading, so come back in a few days to resume trading after some of the irritation has subsided.

When you do begin again, cut your position size down to an amount which is insignificant, whether win or lose. You want to gain some confidence in trading well once again, making some good choices without the influence of recent losses.  P&L becomes an afterthought at this stage.

Focus on the method, on making good trades which work, and then gradually increase your trade size so that the profits return. The first few trades might not grow your account, but they can greatly aid your thinking process by lifting the pressure of “making it back” and then you can get to that shortly thereafter.

Staying in the Game

A string of losing trades is no fun – downright frustrating, irritating, and bothersome. But the idea is to limit the losses when they do come (and we know they’ll come, that’s just part of trading) so that we are still trading when the best opportunities come along.

That’s how my method is. I equate it to a poker player who loses small, hand after hand, folding to surrender antes before finally sticking with his bet when a good hand comes along so that he can win a pot.  Lose small, lose small, win big – that’s exactly how trading must be.  How you choose to respond to losing will make or break you.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

The Importance of Losing Small

April 7, 2009 at 2:05 pm

Losses are inevitable, but small losses are easily overcome.

I put that first because if you don’t read anything else here, I want you to be sure and see that.

In fact, that one statement could be considered the key to my trading.  I remind myself of it often, and when I’m staying disciplined, I am able to see it in action.

Take Monday for example.  I took several trades…7 to be exact.  I made money on only 2 of them (no, it wasn’t a great day), and yet my net P&L was only slightly red.  Just a little bit negative – that’s all.  It was a down day for me, and yet it was about as painless as they come.  A minor loss.  All because I was able to recognize quickly when I was wrong, and immediately focus on damage control.

The trading landscape has changed dramatically just in the past year.  The market is moving differently, the stocks which are in focus are a different group, and there are even some new fees and rules making their way into the fray.  Nonetheless, there is still one constant: the trader who is able to lose small is able to stay in the game.  He’s able to survive, which means he’s able to profit.  And that of course means he’s able to thrive.

Two Big Benefits

Keeping those inevitable losses at a minimum carries with it a pair of huge benefits…

First, when you’re wrong, the damage is far from devastating.  Falling off a pony compared to falling off a Clydesdale sure makes it easier to get up and get back on that horse.  And trading is all about getting back up.  It’s an attitude thing.  It’s important to stay in the game, and that means an occasional bump or bruise is far easier to overcome than the occasional amputation.  The point is this – protecting the downside offers you a safety net to fall into.  Why not use it?

Second, confidence stays high, and that’s a major factor for a successful trader.  Confidence should be protected just as vigilantly as one’s capital, for it can be considered your psychological capital.  Just as money isn’t easily replaced, confidence isn’t quickly replenished once it’s wrecked.  Looking out for yourself by way of small and limited losses means you’re taking no big hits to your trading account or your psyche.

So on those days when you’re just not feeling it and you feel a step or two behind, be quick to recognize it and live to fight another day.  Keep the damage minimized, and you’ll be able to return tomorrow fully prepared to erase that small deficit quickly.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Focus on the Process Now, Results Later (Part 2)

March 27, 2009 at 11:21 am

In recently looking through some archived posts, one that caught my eye was Dave Mabe’s from last summer.  In that post, Dave covered some very important aspects to sticking with your trading plan.

Then in catching up on some reading, I saw where David from Trade-Ideas was just discussing this yesterday over on the Trade-Ideas blog.  He brings forth some very good points, and I’d encourage you to check it out.

All of this got me thinking about where should our focus be as traders?

I’ve discussed this subject before (in Part 1), but it’s certainly worth revisiting and expanding on.

The Game vs. The Score

One of the ideas that I’m continually reminding myself of is that how you play the game is absolutely crucial to success.  It’s about the process.  Today’s trading platforms tell us the “score” at any point in time as measured by our P&L, and while that’s pretty nifty, it isn’t always beneficial. I feel it’s generally more important to focus on the process rather than purely the results. Here’s why.

“There’ll be time enough for countin’
When the dealin’s done.”

With those lyrics, Kenny Rogers said it about as good as it can be stated, but I’m still going to try to build on it! I’ve had a Kenny poster on my office wall for several years, and while he may have been talking cards (or life), the same lesson applies to trading!

I’m sure you’d agree that the trader who is focused more on his method than on his P&L has a distinct advantage over the trader who lives and dies by the red and green numbers flickering in his position window. If you can get to the point as a trader where you’re confident enough in your approach to stick with it for even a single session without relapse, you’ll be in a great position to build on that as a habit.  And good habits pay off.

Driven By Numbers

The market dishes out regular lessons on this topic to me, so it’s something I’m continually working to improve on.  It’s not uncommon to start reacting to the P&L as the day progresses, backing off when mental thresholds for a “good” or “bad” day are approached.  That can be a 2-way street though.  It can allow you to retain profits or prevent additional losses, but how can you add to your bottom line if you’re in a constant dilemma of whether or not to take that next signal?

You’ve got to play in order to win.

Anytime I get too focused on the results (P&L) during the process (in the middle of trading), my decisions tend to be adversely affected, which in turn has led to a plethora of mistakes.  It happens when my attention is fixated on my P&L – when it begins to cloud my thinking and skew my view.

Sometimes striving to achieve some set level of profits for the day can result in overstaying my welcome in trades.  At other times, that desire to secure a good day has caused me to exit prematurely from good trades which were giving no reason to bail.  Both are cases in which my P&L was the driving force behind my decisions.  But the tape should serve that purpose.

Maybe you’ve been there too.

The Buzzer

Flexibility and a willingness to adjust your plan when conditions deem it necessary doesn’t have to mean going into shut-down mode. If there’s clearly a reason to call it a day or a week, then don’t force the issue.  Whether that means a lack of setups to play or just poor risk/reward conditions, submit to it.  And if you’ve hit a drawdown level that tells you it’s time to stop losing, then do it.

But barring that max-loss situation, when it comes to trading vs. not trading, the deciding factor shouldn’t solely be your P&L.  Commit to deciding on a per-trade basis, and see where it gets you. Take the good entries which come your way if you know they are suitable for your method and the overall conditions are in favor for your approach.  Otherwise, pass and continue waiting.

At the end of the day, add it all up.  Some days will be mediocre, some will be excellent, and some you’ll be eager to forget about.  But as long as you keep doing the things which you know will deliver success over time, there’s no reason to let the scoreboard distract you.  That’s just one of many ways to get beaten.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]