HOW TO PROPERLY MINIMIZE LOSSES
As traders, we generally try to accept that we will generally be profitable over the long-term. There are many aspects to achieving long-term profitability. One of these aspects however, is very elusive – and it deals with how to minimize losses.
Over the years, one of the most valuable lessons I’ve learned while trading the markets is how to recognize the emotion of hope; and more importantly, how to rid myself of this emotion while trading. Hope is the emotion you feel while you are in a trade which is modestly going in your favor, then turns against you. During this situation, you will feel a voice inside you which tends to say something like “hold on, it’s gonna turn around any second…just a few more ticks…”. This will KILL your trading returns over time.
One way that I have been able to help cope with this emotion is to set strict “time-based-stops” on my positions. Meaning this: If I am day trading I will set an amount of time which I will stay in the trade – and when this time is up, I will exit the trade with no hesitation. One can think of this as a “shot clock” like in basketball, where the player is on a time limit to shoot…and if the time limit runs out, the player is left without any way to score a point.
Try experimenting with different time-based-stops for whatever time frame you are trading. Over time you will get a feel for what patterns are ready to move price right away and what patterns do not.