August 2013OPENING POSITION
August 2013Money management — that’s what makes you a successful trader and that’s what should have top priority when you create a trading system. When we are unsure about what the future holds for us, we tend to insure it: we insure our homes, our valuable belongings, our cars, our health, and our life. The element of the unknown exists in the markets as well, yet for some reason we tend to be reluctant to protect the money we invest in the market. We don’t think of the market as an unknown. On the contrary, we always think we know what the market will do and that we will always be right. Yes, our egos can create a lot more harm than good.
And let’s not forget emotions — especially pride, greed, and fear — which have a tendency to be firmly rooted in our memory. As we hold on to these emotions, we deny ourselves the ability to look at each new trade we place with an open mind. We are well aware of different ways to place stops, such as those discussed in our interview this month with Lan Turner starting here. But we are reluctant to place them. This is mostly due to our fear of being stopped out of a position too soon; that is, after getting stopped out, the price may move in our favor had we still held onto that position. On the flip side, if we let the losses become too large, pride gets in the way and we refuse to get out of the position.
Erasing these emotions from our memory is a huge undertaking. Perhaps the first step to take in trying to eliminate emotions from our memory is to quantify the effect of losing positions. In Trading Without A Backstop beginning here, author Anthony Trongone creates a statistical model that measures the costs, profits, and savings of using stops. Trongone analyzes the effectiveness of placing stops at specific times in the market to determine when and where it is best to place your stops. Your trading methodology may differ from his, but you can perform a similar study by modifying it to suit your trading method. If you want to learn more, you can attend a seminar in person in Morristown, NJ, on July 27–28, hosted by Stocks & Commodities magazine, where Trongone will teach you how to apply similar techniques, so you too can enhance your trading systems and learn where exactly to place to those stops. For more details, please visit our website at www.traders.com/seminar.
Hope to see you there!
Jayanthi Gopalakrishnan, Editor