Limiting Your Winners and Letting Your Losers Run?

[nhallett 10]

It occupies a chapter in just about every trading book ever written. It's been preached by every lecturing market guru since the Aden Sisters danced to the music of the gold market. Go ahead and hire a personal trading coach and likely the second thing he or she will utter will be these chosen words (right after “Futures trading is speculative and only risk capital should be used.”)… and those words are, “Limit your losses and let your winners run”.

 

OK. We've been told. But you didn't have to tell us. It makes perfect sense. “On a roll”… “Go with the flow”… “Ride the wave”… “Get out while the getting's good”… we've heard both sides of those golden words massaged in numerous different phrases.

 

We get it.

 

During my trading and coaching days, I would re-visit students that I trained weeks or months previously and low and behold I would discover that many of them were actually doing the opposite... letting their losses run and limiting their gains. After a while I wasn't surprised… I would go into a refresher visit EXPECTING to see “limit/run rule” repeatedly

ignored.

 

I would ask the students “Why?”... There were many different stories but one main theme… all the traders, in some way, had gotten out of emotional control.

 

During their trainings, I had made sure that they did extensive back-testing on their systems and I did that because I knew that the more they tested and saw that their system would have been successful, the more they would TRUST in the system and have the strength the follow its signals, especially through rough periods.

 

Apparently simply back-testing and seeing “would-have-been” results wasn't enough to keep these traders in emotional control. What I had been missing was that these traders were taking the losing PERSONALLY!

 

These new traders had been seeing losing trades as reasons to let negative thoughts into their heads. A loss would mean that all the articles they read about “gambling” futures traders may be true. All the family accusations that they were crazy futures traders … well, that could have some merit!

 

This kind of negative thinking (as well as other forms of futures-related negative thinking) makes it so you don't want to take a loss. If you take a loss, maybe your that much closer to that idiot futures trader that you've been accused of.

 

So you enter a trade (after, say, coming off a losing trade)and it starts to go south. As the

market heads for your stop, you start looking around at the news, or a chart of a “sister”

commodity that's showing strength, searching for an excuse to make it OK to lift your stop. Found it. “Hello… Cancel Bean Ticket 4154.” Stop Canceled.

 

If the market comes back, you'll be the smart guy or gal that made the right move and turned a loser into a winner. What you really just did, however, is turn a potential winner into a potential loser.. YOU. You may have had a winning trade, but you will

lose in the end.

 

It's not about YOU. It's about THE MARKET. If you don't take your emotions out of it, you don't have a shot. You must see yourself as a trader not someone who is becoming a trader. There's very little room for mistakes in your trading. Leverage makes sure of

that. If you are going to play in the Big League, you have to do act and do what the Big Leaguers do… right from the beginning.

 

Do all you practicing on the paper-trading playing field. Once you put your money up, you either do what your tested system tell you to do or pick a different profession. If you're not training mentally, you're not giving yourself the best chance laughing in the face of your relatives!

 

 

My best,

 

Norman Hallett

Subconscious Training Corporation

[TimRacette 11]

Perfect practice makes perfect. Paper trading can be super beneficial to work out the foundation of your trading system, however once making the switch to live trading and those new level of challenges come into play it becomes a whole new game.

 

One thing I wish I did when I first started was take my time on SIM and get the system down to a T. Instead I rushed into live trading a learned form the school of hard knocks pretty quick. But on the flip side 5 years later I trade futures for a living.

 

Thanks for the post

[nhallett 10]

"Paper trading can be super beneficial to work out the foundation of your trading system, however once making the switch to live trading and those new level of challenges come into play it becomes a whole new game."

 

I definitely agree with you! You can do everything correctly during paper trading, but it's a whole new challenge once you start trading with your hard earned money.

[TimRacette 11]

If you are profitable on SIM it doesn't necessarily mean you will be profitable on a live account, BUT if you aren't profitable on SIM and rush into live trading your hope of being profitable is close to 0%. I agree, master your system on SIM and then begin to understand the emotional battle on live trading small size.

 

Undertrade, undertrade, undertrade as Brian Kovner says. Whatever you think your position size should be, but it in half. I enjoy your posts.