If you determine that you're on the wrong side of a trade (ex. going short when the price is rising) what do you do?

Thanks,
-Bel

67belvedere 

If you determine that you're on the wrong side of a trade (ex. going short when the price is rising) what do you do? Thanks, -Bel

A lot of people advocate hard stops, often determining what your stop is before even entering the trade. Often this is set as a percentage of account equity. 0.5%, 1% or 2% seeming to be the most common. Using the 2% rule, while not impossible its unlikely your are to lose 50 trades in a row and blow up an account. This is probably a good tactic if you can not properly control your emotions. People are adverse to taking losses, but take profits too easily. Hence they do the opposite of one of the major rules of trading "Let your Profits Run and Cut your losses short". I suspect this is why so many new traders fail.

Having a different background in trading, and trading differently than most indicator based traders here this is not a rule I adhere to personally (hard stops that is). My #1 rule for exiting trades, is if the logic or reason for being in the trade changes, get out, whether trade is showing a profit or loss!

SMCJB 

A lot of people advocate hard stops, often determining what your stop is before even entering the trade. Often this is set as a percentage of account equity. 0.5%, 1% or 2% seeming to be the most common. Using the 2% rule, while not impossible its unlikely your are to lose 50 trades in a row and blow up an account. This is probably a good tactic if you can not properly control your emotions. People are adverse to taking losses, but take profits too easily. Hence they do the opposite of one of the major rules of trading "Let your Profits Run and Cut your losses short". I suspect this is why so many new traders fail. Having a different background in trading, and trading differently than most indicator based traders here this is not a rule I adhere to personally (hard stops that is). My #1 rule for exiting trades, is if the logic or reason for being in the trade changes, get out, whether trade is showing a profit or loss!

Since @67belvedere seems to be asking this question in different places (and I just answered him once ), I'll kick something in here too.

I think this rule about leaving when the reason for the trade is no longer valid is a perfectly good way to limit losses. What is important is that you limit them. I would vastly prefer to use a reason-based exit such as you mention than to have a percentage of my account as the rule, but having any rule is better than none.

You just need to know what your rule is before the trade, or you will be making it up on the fly.

My second contribution of 2 cents.

Bob.

I appreciate everyone's posts! For what its worth I congratulate you for your achievements. Investing/ trading to most of the world is the substance of mystery, best left to "experts". While I'm happy with the returns I've seen in my managed accounts I would like to learn the craft of trading to generate even modest positive returns on a consistent basis.

67belvedere 

even modest positive returns on a consistent basis

Different people have different styles. Currently reading Jack Schwagers latest Market Wizards book and most of the people interviewed seem to be in the 'don't lose money time after time, and then make most of your profits on one or two really successful trades'. I'm actually a big believe in exactly that you said. Slow and Steady. Throw in the occasional big winner, make sure theres never a big loser, and you'd be surprised how quickly it compounds.

SMCJB 

Different people have different styles. Currently reading Jack Schwagers latest Market Wizards book and most of the people interviewed seem to be in the 'don't lose money time after time, and then make most of your profits on one or two really successful trades'. I'm actually a big believe in exactly that you said. Slow and Steady. Throw in the occasional big winner, make sure theres never a big loser, and you'd be surprised how quickly it compounds.

And remember that the leveraged trading of futures is an excellent way to lose everything in your account very quickly.

Be very careful, and be aware of the need to keep your losses small and also to not let them accumulate. If you can't stay ahead of the losses, take a break and pull back and see what is wrong, or just stop altogether and save your capital. We see stories of blown accounts here all the time, and many/most traders have blown one or two in their lives.

Stay safe.

Bob.

SMCJB 

A lot of people advocate hard stops, often determining what your stop is before even entering the trade. Often this is set as a percentage of account equity. 0.5%, 1% or 2% seeming to be the most common. Using the 2% rule, while not impossible its unlikely your are to lose 50 trades in a row and blow up an account. This is probably a good tactic if you can not properly control your emotions. People are adverse to taking losses, but take profits too easily. Hence they do the opposite of one of the major rules of trading "Let your Profits Run and Cut your losses short". I suspect this is why so many new traders fail. Having a different background in trading, and trading differently than most indicator based traders here this is not a rule I adhere to personally (hard stops that is). My #1 rule for exiting trades, is if the logic or reason for being in the trade changes, get out, whether trade is showing a profit or loss!

Fully agree. This is the methodology I use for all of my long term trades and stock investments.

In case I want to place a stop for whatever reason, I place a (mental) end of day stop. Although there might be heavy losses on individual trades, there are very many turnarounds just where many stops are placed. After comparing for a long time, I now place this type of stop almost exclusively. (If I place a stop, which usually is not the case.)

Best regards, Myrrdin

SMCJB 

Having a different background in trading, and trading differently than most indicator based traders here this is not a rule I adhere to personally (hard stops that is). My #1 rule for exiting trades, is if the logic or reason for being in the trade changes, get out, whether trade is showing a profit or loss!

myrrdin 

Fully agree. This is the methodology I use for all of my long term trades and stock investments. In case I want to place a stop for whatever reason, I place a (mental) end of day stop. Although there might be heavy losses on individual trades, there are very many turnarounds just where many stops are placed. After comparing for a long time, I now place this type of stop almost exclusively. (If I place a stop, which usually is not the case.) Best regards, Myrrdin

Great to read these ideas.

It's been said already that different traders have different styles. My impression is that controlling losses by not having a stop as such, but exiting when the trade is no longer valid based on the original reasoning, or something like having an end of day mental stop, is used more often by traders with a longer-term (multi-day, multi-week) timeframe in mind. And when I traded stocks on a longer-term basis this was exactly what I did too. There's seldom a great need to act this very second in that case, and you have time to understand what's going on. Also, stops placed in the market tend to cluster together with stops a lot of traders are placing, and are sometimes just going to get everyone knocked out at the same time, just as price turns, as they provide liquidity (opportunity to get in at a better price and with more size) to other traders.

Since I only trade intra-day in futures, I always have a stop order sitting where I want to be out, just because it's harder for me to react well (and quickly) when things are changing quickly. I advance it by a mechanical rule that doesn't let me decide to try to wait out a loss, and I don't get picked off too often, so I must be putting them in places that aren't that popular for placing stops with other traders. But basically, I just want to have something that will take me out. I don't need to be perfect, and I won't be anyway.

I won't say there is any one right way, but not having some clear way to limit your loss is definitely a wrong way.

Bob.