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This post first appeared in the http://www.tradersaintforum.com
Adherence to stop losses is important and vital but allowing a trend trade to run its course before tampering with it is just as important- if not more. Now let us take another trader: unlike the first individual above, this trader is more disciplined, more ruthless. He knows the importance of stops and he realises the importance of his capital and its preservation, – he therefore adheres to his stops. Not only does he adhere, but he realises that stops are to be placed at vital points (talking Tech Trading). He takes on the Market and after 10 trades, he ends up with 5 losses, and 5 wins i.e., 5x-5x=0. He has lost commissions, miscellaneous charges and has nothing. His next 10 trades include 6 losses and 4 gains (all gains are about x, whilst the losses are also at x each). Thus, he ends this on a losing note as well.
This trader has actually gotten it better than the previous individual. He has followed half of the theoretical concept and finds himself perennially at a breakeven or mild losses level. After 20 such trades, he realises that his fallacy was in placing stops in the first place. The next 10 trades see him hurtling down and joining the previous trader in his ranks. What has happened here is a slow breakdown of the discipline of the market, – which is nothing but a totality of minds in action. Frustrated and disappointed, he thinks that his fault lies in the method, his system, and runs around in circles collecting various indicators to find the ‘Holy Grail’ of trading.
So too at the end of the month, when we look at our Trade Analysis, we kick ourselves for not adhering to our stops. We instantly notice that our stops of x were not adhered to a few times and that this has led to a downfall in that specific month. However, in reality, nothing could be further than the truth. What the Month end analysis does not show is that the profits earned of say x or 2x was in a move of 10x or 12x. To put it simply, we did not capitalise on the move. Not capitalising sends the mind into a spiral of regret that ultimately prompts the mind into making severely wrong decisions. The end result is a multitude of trades that are taken at wrong times, stops that are placed at incorrect points and the execution of several useless, unnecessary trades – whilst the broker, instead, laughs all the way to the bank. Even if the correct stops are taken, the trader does not make enough to cover the losses that are sustained. Finally, a continuous lack of victories sends the mind into ‘Defeat Mode’ and the unfortunate individual then finds every possible way to shoot himself in the foot…
To combat this tragic tale, the wisdom of the ancients has always been to cut the losses, and to ride the profits. Somehow, the 2nd half of that great wisdom seems to stand neglected and forgotten. Obey that wisdom, and great profits will follow. Neglect it, and peril will ensue in a matter of time.
Dr. SREEKUMAR RAVINDRAN
Founder and Chief Managing Director at Tradonomix
Dr. Sreekumar Ravindran, known as Saint in trading forums such as Trader Saint Forum & Traderji, is the visionary and mind behind Tradonomix. He is a passionate trader himself and has spent over 15 years researching and accumulating knowledge of trading and applying the same in real-time.
Dr. Sreekumar strongly believes that trading is an aquired skill and that awareness needs to be created for trading as a profession for the common man. Tradonomix is one of his first steps towards this belief, from where he intends to take Tradonomix to an advanced technology-driven social platform for learning and achieving financial independence.