02 Dec Taking losses and Dealing with Disaster
On December 2nd, 2009, we held an impromptu webinar over GoToWebinar where 203 attendees heard a discussion about what is probably the most important topic in trading psychology: The ability to take losses. The conversation was triggered by an email I got from a follower who lost $15,000 (I thought it was just 15 ES points) trading on Monday.
This person has a trading plan, uses stops, defines and accepts his risk of his trades and believes that he is generally disciplined. He has been in this business 15 years and has a rough time over the last 3 months. Does this sound familiar? It does to me.
I read our email correspondence in TinyChat before we were forced to move to GTW for technical reasons, but it seems like he had it all together and this was just a bad day. However, trading is much like sports competition or battle in that the outcome is as good as the weakest link in the system.
Firstly, this person did not have a daily loss limit. I have discussed daily loss limits before. I have one on my account and it is based on my 20-day average daily net profit. It is the safety valve that gets tripped when things are really getting out of control. It is a lifesaver and I have regretted adjusting it during the day 9 out of 10 times. Adjusting it usually leads me to run up more roundturns with no benefit or, worse, I lose more money. I just don’t touch it any more when it is triggered.
Secondly, this trader complained that he had overtraded. This is a natural response to losing while trading. We want to fight back. Unfortunately, trading is not the place to do it. What got this trader in trouble is not having a Risk Management Plan.
Here is a sample:
- Trade normal size until I have a net loss of 3 pts
- Following that, I cut my size in 1/2 and continue to take only my highest probability setups
- If I take 2 more losses on my highest probability setups, I’m done for the day.
- If this occurs again for the week, then I’m done trading live for the week.
- My daily loss limit is 10 ES points. If exceeded, then I will not trade the following day but will continue to observe, journal and study the market.