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Interesting Information - Managing Losses

  • #1
  • First Post: Oct 19, 2006 12:01pm Oct 19, 2006 12:01pm
The following quote is right on. It supports what I've been saying on this forum for months. Individual trades are not about making money. They are about managing losses.

-Dial

Quoting Boris Schlossberg
Most traders lose because they tolerate their losses. They allow positions to move hundreds of points against their entries, they add to losing positions and more often than not they allow one bad trade to wipe out many trades worth of profits.
Trading is not the art making money. It is the business of not losing money. That may sound simplistic, but in order really understand trading you must accept the fact that wins are often a matter of luck but losses are strictly a question of skill. That is why once the trade moves in our direction by 50% of our risk we move the stop to break even and take some money off the table. If we get stopped at break even and the trade then goes on to made oodles of cash, so be it. We move on and look for the next good idea.

Let us demonstrate to you in very simple terms why capping your losses is so important. Two scenarios. Scenario one you are in a short term day trade with 30 points of risk. It moves in your direction by 15 points then stalls. You place the stop at breakeven and it bounces back and takes you out of the market. Scenario 2 is the same trade except this time you hold your stop 30 points back and refuse to budge. You are either going to make your target or you will get stopped you tell yourself. Surprise, surprise, you get stopped out for –30. But here is the kicker. Suppose you wanted to make 30 points by end of that trading day. Under scenario 1 you would only need to make 30 points in a trade to reach your target. Scenario 2? You would have to make DOUBLE – 60 points to reach that same target. Why? Because you would have to make up the 30 point loss before you could even begin to think about making profits. Repeat this dynamic hundreds of times over a year and you start to appreciate the fact that profitable trading has far more to do minimizing losses that any other factor and therefore the most successful practitioners of the craft are some of the most intolerant people on earth.
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  • #2
  • Oct 19, 2006 12:22pm Oct 19, 2006 12:22pm
Priceless information Dial! These concepts need to be internalized by all traders and investors, so much so that it becomes as instinctive as birds flying south for the winter. When I was a retail broker at one of the major NY firms, I used to take my clients with an appetite to trade through this excercise on a regular basis:

A 5% loss requires a 6% gain to recover, a 15% loss requires an 18% gain, a 25% loss requires a 33% gain, and a 50% loss requires a 100% gain.

Kudos to you and the whole FF/PF crew for threads like this!

All the best,

Michael
Michael fxgorilla
  • #3
  • Oct 19, 2006 1:08pm Oct 19, 2006 1:08pm
Quoting fxgorilla
Priceless information Dial! These concepts need to be internalized by all traders and investors, so much so that it becomes as instinctive as birds flying south for the winter. When I was a retail broker at one of the major NY firms, I used to take my clients with an appetite to trade through this excercise on a regular basis:

A 5% loss requires a 6% gain to recover, a 15% loss requires an 18% gain, a 25% loss requires a 33% gain, and a 50% loss requires a 100% gain.

Kudos to you and the whole FF/PF crew for threads like this!

All the best,

Michael
Thanks Michael! And you bring up an interesting point. Nearly every trading book points out the percentages as you did, but few traders understand what those percentages are saying. What those percentages say to me is this:

Pips against you are more harmful than pips with you are helpful.

This is because when we lose pips, our account decreases. With a decreased account, we have to trade a smaller position. Having a smaller position means we have to gain MORE pips than we lost in order to just break even!

Thanks for the input Michael!

Dial
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  • #4
  • Oct 19, 2006 1:27pm Oct 19, 2006 1:27pm
I really learnt a lot from this information, but an opposite situation has also worked for me.

As long as I give myself room not to be stopped out of a trade (say trade only about 10% of margin wit extremely wide stops or even no stop at all), I will ride my losses and watch them come back to positive territory. What goes down must come up.
  • #5
  • Oct 19, 2006 1:33pm Oct 19, 2006 1:33pm
Quoting diallist
Thanks Michael! And you bring up an interesting point. Nearly every trading book points out the percentages as you did, but few traders understand what those percentages are saying. What those percentages say to me is this:

Pips against you are more harmful than pips with you are helpful.

This is because when we lose pips, our account decreases. With a decreased account, we have to trade a smaller position. Having a smaller position means we have to gain MORE pips than we lost in order to just break even!

Thanks for the input Michael!

Dial
In simplistic terms...
10% loss on 100 = -10. Balance = 90.
10% Gain on 90 = +9. Balance = 99.

The not too simplistic
Down 10 Then Up 10 = 10% loss of percenatage Loss.
Lose 10% then Gain 10% results in a 1% loss.

Now we are all F__k_d up in the same boat.
  • #6
  • Oct 19, 2006 1:36pm Oct 19, 2006 1:36pm
Quoting diallist
Thanks Michael! And you bring up an interesting point. Nearly every trading book points out the percentages as you did, but few traders understand what those percentages are saying. What those percentages say to me is this:

Pips against you are more harmful than pips with you are helpful.

This is because when we lose pips, our account decreases. With a decreased account, we have to trade a smaller position. Having a smaller position means we have to gain MORE pips than we lost in order to just break even!

Thanks for the input Michael!

Dial
This is simplistic but.. It's a lot like football (American). It's all about field position. In a tough game, you want to try and not get pushed back down the field too far. That way when your break comes you can score.
I need a nap.
  • #7
  • Oct 19, 2006 2:16pm Oct 19, 2006 2:16pm
Quoting bapxyz
This is simplistic but.. It's a lot like football (American). It's all about field position. In a tough game, you want to try and not get pushed back down the field too far. That way when your break comes you can score.
I need a nap.
Great analogy!!
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #8
  • Oct 19, 2006 9:45pm Oct 19, 2006 9:45pm
Good post Dial, i have followed Boris (and Kathy Lien) for some time now. Words of wisdom!

An Oregonian's Analogy: When bird watching in cougar country with a friend, wear sneakers not hiking boots. If the friend ask's where your boots are say your mama borrowed them. (Short story: Make sure you can outrun your friend cuz them big kittys are faaaaasssst!).

; ) Thom
  • #9
  • Oct 21, 2006 10:50am Oct 21, 2006 10:50am
Quoting accrete
Good post Dial, i have followed Boris (and Kathy Lien) for some time now. Words of wisdom!

An Oregonian's Analogy: When bird watching in cougar country with a friend, wear sneakers not hiking boots. If the friend ask's where your boots are say your mama borrowed them. (Short story: Make sure you can outrun your friend cuz them big kittys are faaaaasssst!).

; ) Thom
Thanks. We are doing a couple of shows (work) in Redmond this year and I won't tell the wife about this when we are hiking.
  • #10
  • Edited 12:38pm Oct 21, 2006 12:12pm | Edited 12:38pm
Hi Diallist,

interesting, but I dont agree complitly with 'move to break even' as soon as you can.

For the nature of the price move, which is made of big waves, and "micro waves", the risk of being stopped out after the price moved +15 for you and you moved stop to 0, is quite high.

Its not so easy to get into a trade at the best bottom (long) or the best high (short) to avoid complitly that at least one time the price goes from 0 to +15 and then back from +15 to 0 and sometimes also from +15 to -5 to meet more buyers willing to buy.

Just my point of view

Generally I move stops higher as soon the price moves higher, but breaking even after a little move gives you a high ptobablility to be stopped out without a valid reason.

Trucco
  • #11
  • Oct 21, 2006 12:30pm Oct 21, 2006 12:30pm
Trucco good point, I like the mouteki method of moving stops 10 pips after 40 pips is in, but I will lock in 50 pips if price moves beyond 70 to 100 pips..
  • #12
  • Oct 21, 2006 12:45pm Oct 21, 2006 12:45pm
Quoting enoc2g
Trucco good point, I like the mouteki method of moving stops 10 pips after 40 pips is in, but I will lock in 50 pips if price moves beyond 70 to 100 pips..
I agree. In general way, as Im much more an intraday trader, if I have 50 / 100 pips per trade I close and then think about the day after.
Its quite hard that price makes 100 pips without retaracemente before keeping his way.
So I go out, and then buy at better price.

On the other hand , sometimes happens that I close potential 100 pips trades with only 10 profit..because I start to suspect the direction is changing from the beginning.
But sometimes I close with +10 and Im correct, because then the trade would have been - 30 or more

When trades suspect me or dont do immeditaly what Im expecting usually I get out and eventually reenter
  • #13
  • Oct 21, 2006 12:51pm Oct 21, 2006 12:51pm
Quoting trucco

Generally I move stops higher as soon the price moves higher, but breaking even after a little move gives you a high ptobablility to be stopped out without a valid reason.

Trucco
I agree and my style of trading is similar to trucco's.

pipranger
  • #14
  • Apr 4, 2007 11:00pm Apr 4, 2007 11:00pm
What a great thread! And so useful!

Thanks Diallist!!! U-Da-Man!!
  • #15
  • Apr 5, 2007 2:43am Apr 5, 2007 2:43am
All domains of activity imply going small steps (e.g. sport, technology, electronics, constructions; the Egyptians didn’t build first the Great Pyramids then little houses and other small pyramids)
I, personally, go for a 20 pip profit per trade, with stop loss reset after 5 pips, then after 10 and the last after 15. In case something goes wrong I still remain with 5,10,15 at least
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #16
  • Edited 3:36am Apr 5, 2007 3:07am | Edited 3:36am
Quoting diallist
The following quote is right on. It supports what I've been saying on this forum for months. Individual trades are not about making money. They are about managing losses.

-Dial
The technique suggested is good only for randomly chosen trades. It means that if the initial position has been taken at a randomly chosen level, then it might make sense to trail the stops to the "break even" point. This could be recommended because the entry point didn't make technical sense in the first place and thus it wouldn't be a crime to protect such a position with a stop that doesn't make any technical sense either. However, if the inital entry point does have some technical significance then traling stops back to "break even" would be a mistake because the levels for stops making any technical significance almost never coincide with "break even" levels.
The bottom line is that the rules suggested are good for gambling and not really for trading. It might be recommended for people not exactly knowing what they are actually doing in the market. Can also say that I never attribute my profits to "luck".
  • #17
  • Apr 5, 2007 5:26am Apr 5, 2007 5:26am
[quote=Igrok;263514]The technique suggested is good only for randomly chosen trades. It means that if the initial position has been taken at a randomly chosen level, then it might make sense to trail the stops to the "break even" point. This could be r.....

Wow, interesting ! I don't beleive I have ever read a position where I would compleatly agree if the positions where reversed. In other words if one is using a random technique, what the heck, don't protect let it ride. Just like betting on a hourse race. But I beleive that if you have a well planned entry you would also have a planned exit and stoploss but when the trade starts the entire dynamic can change. There may be elements out there that you can not see or anticipate but price action will reveal there existance. That is why you should protect some profits when the oppurtunity presents itself.

PS Warn, if you are still trading it would be interesting to hear how you are doing after your post.
  • #18
  • Apr 5, 2007 5:54am Apr 5, 2007 5:54am
Well, I hadn't seen this thread before - very good post Diallist! I play Texas Hold'em and the exact same theory applies. In order to be successful you must manage your bankroll/losses; do not take extreme risks and, if the cards are not on your side, FOLD! Even in forex, most people think they can Bluff their way into the money!

Good luck all!

D.
  • #19
  • Edited 6:40am Apr 5, 2007 5:58am | Edited 6:40am
Quoting bapxyz
Wow, interesting ! I don't beleive I have ever read a position where I would compleatly agree if the positions where reversed. In other words if one is using a random technique, what the heck, don't protect let it ride. Just like betting on a hourse race. But I beleive that if you have a well planned entry you would also have a planned exit and stoploss but when the trade starts the entire dynamic can change. There may be elements out there that you can not see or anticipate but price action will reveal there existance. That is why you should protect some profits when the oppurtunity presents itself.

PS Warn, if you are still trading it would be interesting to hear how you are doing after your post.
I'm not talking about reversing a position in all cases. For me it doesn't work this way. My approach to trading is totally different to the one recommended in the first post. The matter is that I always chose a level for stops first and only then and only if the market comes close enough to the stops level (means that I can afford that risk in accordance with my money management requirements) I'm taking the actual initial position also knowing in advance what my risk will be. Therefore, trailing stops for me make sense only if and when the market creates another technical level that would be closer to the initial position that I took. Only then I can reduce the risk by chosing another and obviously a better level for stops than the initial level was.
  • #20
  • Apr 5, 2007 6:18am Apr 5, 2007 6:18am
Quoting Igrok
I'm not talking about reversing a position in all cases. For me it doesn't work this way. My approach to trading is totally different to the one recommended in the firs post. The matter is that I always chose a level for stops first and only then and only if the market comes close enough to the stops level (means that I can afford that risk in accordance with my money management requirements) I'm taking the actual initial position also knowing in advance what my risk will be. Therefore, trailing stops for me make sense only if and when the market creates another technical level that would be closer to the initial position that I took. Only then I can reduce the risk by chosing another and obviously a better level for stops than the initial level was.
OK I see. We are probably not all that far apart. I guess the only differance may be that I will get out of a trade with a little profit and then get back in the same trade if the opurtunity presents itself and the conditions are correct, where I think you are saying that you prefere to leave your original stop loss intact for some time frame.
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