Mon 14 Apr 2008
Hi from Mumbai
Posted by ray under Miscellaneous
Hi All
My apologies for missing the blog on Friday - Internet woes. The blog will be back to normal on Wednesday.
An episode in Mumbai serves as the basis for this blog.
- The first was the comment by a local educator that in ‘day-trading, stops are for losers’. Hmm…I could see what he was getting at but I think that the advice is poor advice for the newbie.
In my approach to the markets, I ALWAYS have a hard-stop in the market. It can be a long way away from the current levels and is placed at a level beyond which I am not prepared to lose any more money. In addition to the hard stop, I have time and structural stops. Over 90% of my trades, I exit a position before the hard stop is hit.
That being the case, why do I say that the advice is poor? Because the newbie faces two problems:
- Most newbies are unable to execute mental stops and mental exit strategies.
- If the market suddenly moves dramatically against the position, newbies freeze.
Hence, my objection to the advice.
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April 14th, 2008 at 9:21 am
hi Ray
In an odd way I disagree with you. Not it princple, but in practice. You wouldn’t do it on purpose, but, I can’t help feeling that it is a useful experiance to see how you react when you are “a rabbit (deer for our US friends) stuck in the headlights of an oncoming car”.
Having been on the odd occasion, a little too ‘cocky’ and found myself overtrading, and stuck in an excessively large position, that is moving in an adverse direction, I can speak from experiance. The discompfort level is very high. It has unique qulaities of anxiety, hope, fear, dispare and I am sure you can think of few more associated feelings. Basically, you don’t want to go there again. I find it a great motivator to follow my plan, and use stops.
Was it worth experiancing? I think so.
Do I want to go there again? No way. I will use my stops.
Stuart
April 14th, 2008 at 1:11 pm
Yes, I think that is a careless thing to say as an educator. I also *usually* have a hard stop in immediately, but there are times when the price action is such that I don’t want a spike in an ETF to take me out, which has happened. At these times, I am usually watching closely, ready to exit with my “finger on the trigger”.
April 14th, 2008 at 8:44 pm
Ray,
Does the current down-drift mean we are going to retest 1358-1370 area per last week’s failed auction?
Thanks, Joe
April 15th, 2008 at 2:46 am
I kind of attribute it to the arrogance of youth and the illusion of control. Whether it’s power outages, internet issues, computer problems, or even getting hit by a car for those who hold trades overnight, there is no limit to the number of catastrophes that can prevent you from exiting when you intend - no matter how disciplined you are - and if you trade long enough you are almost certain to encounter one sooner or later. A loss that would have been entirely preventable.
April 16th, 2008 at 6:21 am
Hi Doug
I totally agree. Any ‘black swan’ event could occur and I’d hate to have an open position unprotected.
April 16th, 2008 at 6:23 am
Hi Jeff
I know what you mean - which is why I tend to exit before my stop is hit. On the other hand, I am unwilling to have an open position without some sort of stop somewhere.
Earlier this year, Taiwan had an underwater earthquake that brought down all of HK’s connections. Knowing I had a stop in place gave me some reassurance of limiting my loss.
April 16th, 2008 at 6:26 am
Hi Stuart
Hmm. I think it’s an experience I could do without as could most newbies. If it were the fact that one large loss would stop further occurrences then I’d be all for it.
My experience is most newbies need to learn the lesson a number of times. Better I think that they just learn to place a hard stop as a matter of course.
April 16th, 2008 at 6:27 am
Hi Joe
See today’s blog.