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PristineTrading

Personal Responsibility and Decision-Making

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You find a near perfect Pristine Buy Setup, meeting all the requirements of your trading plan, and devise a plan to trade it. Now the stock is at your established entry price, you click on the buy button, and it's done! You just bought yourself a position in XYZ. Whatever outcome is produced by this position should be considered your responsibility. Both a positive or negative one. But this isn't always the case.

 

Our culture has suffered from a loss of the personal responsibility values that built it. These days, an individual walks into a McDonalds and after getting fat due to the excessive consumption of burgers, sues the company for making him fat. It's the old "the devil made me do it" rationale. But we have to understand that every action, even the decision not to-do something, is made by the individual out of free will.

 

When an individual considers taking some course of action, he will compare the perceived positives and negatives of taking such action, and if the positives outweigh the negatives, he'll proceed with it. This same rationale can be applied to trading. When you take a position, it should be because the probable positives of taking such a position outweigh the potential negatives (High odds). A proper trading plan should see to this. Novice traders, never seriously considering the negative potential of any trade, will base their decisions on a constant bias towards the positives. When your stop loss price is hit, you and only you are responsible for the outcome of your trade. It's easy to blame specialists, market makers, or other dastardly subjects for your loss. But it was you in the first place that decided to buy/sell short that position. You should have considered all the probable positives and negatives of taking such a trade. Is this a NYSE stock? Learn about the execution conditions that exist in listed stocks before taking that trade. Is Bernanke speaking while you plan to hold on to your position? It's your responsibility to know all possible implications.

 

At the end of the day, you take a position, and it either moves in your favor, or against you. If you're right, you'll make money; if wrong you'll lose some. In either case, you and only you will be responsible for the outcome. Understanding this is a step towards professionalism.

 

KURT CAPRA

Contributing Editor

Interactive Trading Room Moderator

Instructor and Traders Coach

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    • By inthemoneystocks
      One of the most important reasons why traders take big losses is because they often fail to recognize when a trade has gone wrong. You see, stopping out of a trade is probably the biggest fault of traders and investors. Often, this happens to young and inexperienced traders and investors, but I know many veteran traders and investors that struggle with this as well. Early in my own career I struggled with stopping out of a bad trade myself, so I can sympathize with this problem. 

      The problem with taking a loss is really two fold. First, the trader has to admit that he is wrong. As you all know, as human beings we all hate to be wrong. The ego simply gets in the way and we all want to always be right all the time. The first secret in this business is to check the ego at the door. The market does not care about your the color of your skin, religion or anything else. It will move in the direction of the money and that is the bottom line. Once a trader or investor goes into what I call 'hope mode' the trade is over. I'm sure everyone has been in this position at one time or another. Simply put there is no room for ego or hope in the stock market. The market is always right and there is no reason to fight it. 

      Here is the second problem with taking a loss, it hurts. Pain and pleasure are the two reasons why humans do anything at all. As a human being, we are always looking to have pleasure and avoid pain. Well, losing money is painful and many people would rather simply hold a losing equity than lock in a small loss and move on. I cannot tell you how often I see a trader hold a losing trade only to see the position move further out of the money. Many years ago I watched a day trader blow up a $200,000 account in a single day averaging in on a bad day trade. To this day I can remember the look on his face as his money vanished in thin air. Believe it or not, this trader could have exited the position with a $500.00 loss, but instead he kept averaging in and fighting the position until he was wiped out. As a rule, once you have your full position you should never average in on a trade. At that point, it is critical to know where your max loss is going to be and stop out if that level is breached.

      Now when should we stop out? The answer to this question is not that simple, but here is what I personally do. I always place my stop loss below an important breakout or pivot on the chart. You see, prior breakout or pivot levels are usually defended when retested. After all, this is usually an area where institutional traders and investors got involved, that is why there is a pivot low or high on the chart to begin with. If that level is breached on a closing basis then I will move out of the position. So If I took a trade based on a daily chart pattern then I will usually check the daily and weekly chart levels. If there is a major pivot on the weekly chart then I will use a week chart close as my stop out level. While this method may not be perfect, it has saved me from much bigger losses when I have been wrong.



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