Planning for their losses

Brett N. Stinberger - Doctor of Philosophy and Professor of Psychiatry at the Medical University in Syracuse, NY. New York. He is also an active trader and writes articles on market psychology. The author of the book "Psychology of Trade, 2003. Doctor Stinberger published over 50 articles on short-term approaches to behavioral change for traders.

The question that I hear most often refers to limiting losses. Certainly, traders wondered how I define their stops, particularly in transactions, which lasted an average of less than 30 minutes. I believe that the key to a successful sale is to feel comfortable in taking the loss. We know that because the markets are largely not effective, complete predictability will never be achieved. This makes the trade a few similar strike in baseball, where you can achieve a high degree of success, even making frequent misses. Losing traders often try to measure the degree of perfection of their trade. They equate a good trading day, with a lucrative afternoon. No, no and no! Good trading day - this is the one where you followed a well-calibrated trade plan with the appropriate concentration and discipline. Good trading days, after a certain time, will bring a profit. But the uncertainty in the markets means that even the best trading plans can become confused. In the short run, you can not control their profitability. You can control whether you have a good trading day, which will bring profit in the long run - if you are properly investigated their policies.

Broken clocks are right twice a day, and even unexplored strategy, performed impulsively, can sometimes lead to profits. This may resemble a good trading day, but in reality, they only exacerbate future failures. Trader striving for perfection, taking the loss equates to failure. The loss, therefore, sets it to a negative internal dialogue and leads to subsequent transactions generated by disorder. A more realistic Trader understands that there is some uncertainty in the market and that the losses are simply a cost point of this type of business. The aim is to limit these losses, as effectively as possible rather than attempting to exclude them altogether, and did not become concerned about them.

Schema definition stop number 1: Based on the price
In this article I will cover three basic strategies for determining the stop - on the basis of price, based on time and on the basis of the indicator. All of them can be rehearse beforehand, to make the adoption of a more automatic loss (ie, less emotional). Most traders familiar with the stops on the basis of price (although not all have them!). I'm using the stop based on prices as the last refuge of Losing situations where time and displays will not lead to the closure position. I consider each transaction as a hypothesis. If I buy a SP into a temporary one minute, then it is because I have identified the likely minimum point in this market. Perhaps, I noticed that the values TICK Dow and the NYSE Composite declined to significant negative values, but the price remains above its previous level. I can place your order for purchase, setting a stop order on the previous minimum. I put forward the hypothesis that the preceding minimum is an essential minimum and that this setback is the first to move up. If we return to the previous minimum, my hypothesis is not confirmed, and I have to limit their losses. The key to the identification of those stops on the basis of price is that your entries are about the likely points of maximum or minimum, so that losses were not excessive, if your hypothesis fails. With short-term transactions, which means that I have researched one minute and five schedules. Remember, if the model on which you sell, at the historic test are only a 50% winning, then you need to keep the size of transactions Losing is much lower than the average size of winning deals that your system has been profitable!

Schema definition stop number 2: on the basis of time
The second approach uses time limits losses. One system, for which I sold, was designed to retain the position of the period of 21 minutes to grab 3 points S & P. If desired profit was not achieved after 21 minutes, then I must withdraw from the market, even if my stop on the basis of price has not been achieved. The logic of such a stopping time based on the following: I try to enter into short-term transactions where the momentum is increasing in the direction of my trade. If I was successful, the position should become profitable quickly enough. If the market remains in Flat and slightly decreases, when I opened a long position, it means that I have interpreted the wrong impulse. This also is incorrect hypothesis. I know from personal experience that when the market remains flat, I was probably right about the direction of motion, but this plane motion is all that the market is going to give me. This means that the next movement is likely to impress my stop on the basis of price. Out of position on the basis of time, thus allowing me not to lose one or two paragraphs. One of the few solid trade laws is that risk and profit in the transaction is proportional to the period of retention of position. I recommend you in the development of its trading system, taking into account the factor of retention period, the positions as a way to achieve alignment between your practice and your personality and risk tolerance. I developed a system of 21 minutes, exploring the best predictors of return 3 points on the S & P for various short periods of time. I researched a lot of indicators - volatility, momentum, volume, intra-day increase / decrease, sector indices, intra-day TRIN, etc., to invent something that would show good results when testing on independent data. Once the system was built, stop at a time has already been built in addition to my stop on the basis of price.

Scheme of the stop number 3: Based on the indicator
The third methodology is limiting losses is based on the indicator. As I indicated above, many of the predictors, which I use in my trade - it is intra-day version of the market indicators for the ordinary shares, such increase / decrease, the new maxima / minima and the new volume. I spend a lot of time testing these indicators in the estimated price effects - the relationship between indicators and between indicators and price, which is always changing. For example, the combination of indicators in the 21 minutes that I use today, can not be (and probably will not) combination, which I will use next year. My goal is to determine what works in the market, and use this combination until the situation has not changed. Most of the study, which included the development of commercial approaches, determines what happens when the indicators that are candidates for predictors, reach extreme values. Extreme value indicates the continuation of the trend, or is it predicts a turn? Such information may be useful in determining the stops. For example, one of my trade patterns using a two-period, the retention position.

TICK NYSE Composite is an important predictor for this approach. I recently researched what happens when TICK breaks from his two-band. Interestingly, when the TICK breaks significantly above its range, the market averages are moving up by 20% over the next few hours. When the TICK breaks significantly below its range, the average decrease of 11%. (This corresponds to the average raise of about 2 points for the SP against the loss of one point). During my test period, the market has increased 148 times and has fallen 184-fold when the TICK breaks down, as well as increased 205 times and 121 times decreased when the breakthrough came in the top side. Armed with such a study, I defined a stopover on the basis of the indicator. If TICK breaks to a significant new peak or a new minimize to my position (that is, the new maximum if I have a short position or a new minimum, if I am in a long position), I close the position - even if my stop on the basis of price has not been achieved . (In some situations, I can even close the position and open the other way, given the bias for short-term to continue to break TICK).

If you spend the time to explore the intra-day indicators in different time formats, you can create a stop at a bar that will suit your trading style and approach.

The use of stops as a psychological tool
Once the stop defined, they can mentally rehearse, while the trade continues, as a way to guarantee that they will be implemented. The good the loss - the one that is planned, the only real market failures - are those that are unintended. I watched the recording of trade of many mentors - Linda Raška, Ken Wolf, Mark Cook, Ari Kiev, Alexander Elder, Mark Douglas, and many others who have taken interview Jack SCHWAGER in the book "Market-based wizards. These successful traders and mentors emphasize that discipline is the basis for a model of trade.

When you install, repetiruete and kept stopping you is building this discipline and use their losses to secure the qualities necessary for success. The irony is that successful traders are planning "failure", but not unsuccessful in their plan.

Forex Magazine
based on www.brettsteenbarger.com