Keep moving your stops? Trade Management Improvement...

Every now and again a trader will email me about their Trade Management issues, saying something along these lines....

"Is there any drill or exercise to cure my deadly hang-up of not stopping out when I should have? In real time when price started to go against me I would always come up with vision of grandeur and rationale in my mind to tell myself that the price will come back my way soon so no need to stop out. Only to have it go away farther and farther times and times again. Yet I just could not shake such stupid repetitive mistakes. I would move the hard stops farther away or sometime even removed it all together... Are there people other than I that have such stupid problem?"

In fact - the one above came into my inbox today. So I thought I'd answer in a blog post. There is a clever solution to this trade management issue. It's not mine though - it came from John Grady at No BS Day Trading

So the problem is simple. You don't get out of losing trades. You might start off with a stop and them move it as price approaches it. Obviously, there is some rationalization going on that this will increase profits. That rationalization differs from person to person but the upshot is that at the time, there is a belief that the behavior will avoid loss/improve gains.

The solution is as follows:

  • Set aside an amount of money to LOSE (yes, real money)
  • Tell yourself this money is as good as gone, write it off in your head. Let's say the amount is $2,000
  • Trade as normal - BUT - with the goal to lose that money.
  • The only thing you will do differently in order to lose the money is NOT move your stops.

So now you will be in a situation where you are purposely not moving your stops. Losing money is not an issue as that is your goal. So there should be no little monkey on your back telling you to move the stops.

What's the usual outcome of doing this? Well, surprisingly, a lot of traders have a hard time losing the money. And that's the whole point of the exercise. It gives you a bit of breathing room to implement better trade management without the hang-ups that cause you to misbehave.

Without exception, every professional trader I've discussed trading with has put "getting out of bad trades early" as one of the top 3 factors in their success. It's usually the top 1. Of course, it helps if you aren't getting in at the wrong time too - but that's a different issue!

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