When trading the financial markets, we are truly in the lap of the gods. We can perform all the analysis, examine all the charts, make a great case using Elliott wave principles and Fibonacci concepts, and convince ourselves that the odds heavily favour our stance. But, as we all know, markets often have minds of their own, and refuse to follow the script.
The game of trading is a percentage one. If you perform enough high-percentage trades, you will make profits overall, even though an individual trade may be a loser. The key is to keep losses contained.
Emotionally (and trading can be very hard on the emotions!), it is a good idea to approach each trade with an attitude of curiosity, rather than being married to it (having an emotional attachment). That way, you can manage your protective stops unemotionally, and be able to pull the trigger when conditions dictate.
That is when employing a money-management rule, such as my 3% rule, comes into its own. Remember, we must never let a loss get out of hand. Otherwise, that’s the end of the line for us.
You can’t expect to get every trade right
Here is a good example in the euro (EUR) / dollar (USD), which I was trading this past summer.
In early September, I was looking for a point to short the EUR/USD. The market had peaked in early August, and was resuming the great bear market (or so I thought).
There was a slight bounce in mid-September, a decline, then another rally right up to previous resistance at the 1.2920 area (as indicated on the chart above). When it backed off, I entered sell stops at 1.2840 to enter a new short position.
The momentum reading was satisfactory – high enough to suggest the rally would be turned back down.
I could then place my protective stop quite close just above the support/resistance line, as an upward thrust through that line would tell me it had more to do on the upside.
• 7 Sept Sold £1 rolling euro/dollar at 1.2840.
• Stop @ 1.2960.
• Risk £120 (2.4%)
Over the next few days, the market went my way (down), and I had more confidence that the support/resistance line was a strong one. So far, so good.
Then on 13 September (not a Friday!), the market unexpectedly reversed course and rallied very strongly. Oops. Since the support/resistance line had turned the rallies back twice before, I decided to give it another chance, and left my protective stop at 1.2840.
I didn’t have to wait long. The market powered right up through the line – and through my protective stop!
• 14 Sept Covered £1 euro/dollar at 1.2840.
• Loss £120.
Of course, I could have brought into play my break-even rule on the 13 September rally. After all, momentum did not fall much at all on the big drop of September 7th. The subsequent rally created a big positive divergence, which gave the game away, I’m afraid.
What you need to learn from your trading losses
But trading involves making decisions along the way, as changing conditions are thrown at us. Sometimes, we get moves we do not anticipate, and we must adjust our stance accordingly.
I was not tempted to move my stop up “to give it more room to work”. This can be a temptation for some. But it is something I never do, even if it means taking a loss. This loss was allowed for before the trade was made. By approaching this trade as another potential high-reward/ low-risk trade, the loss was a normal “business loss”. It so happened that the market did the opposite of my forecast. This does happen.
By learning to take a loss in your stride, you are that much closer to making more winning trades. Taking extremes of emotional attachment out of trading should be the goal. Never be too despondent after a loss, nor too ebullient after a gain.
My loss in this case was 2.4% of my account. So I live to fight another day.