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Monday, June 06, 2005

Being Right vs. Making Money

Trader Mike writes in his blog how important is to place hard stops right after opening a position. He illustrates it with his recent trade and makes it very clear what could have happed if he did not set the stop on the market. I could not agree more with him.

As no trader is able to make 100% right decisions, setting stops ensure that you'll get out of the position before the loss really hurts you.

The Big Picture points out another good point – you should set the stop level before actually doing the transaction, because then you are more objective.

Being Right vs. Making Money
Trader Mike

June 04, 2005
Thankfully with that ABLE trade I got stopped out before I even knew what happened and, more important, before my loss became large. (I was short ABLE and gave back about 2% in the first couple of minutes of the day. The stock rallied about 20% in the first 45 minutes of the day.)

I'm never happy about taking losses but small losses are much easier to deal with than large ones. If I didn't take my predetermined stop just after the open yesterday I could have easily seen that trade ruining my day and probably even ruining my week.

I'm sure the average person would feel better trading a system that had a 90% win rate instead of a system that had a 40% win rate since they could be right 90% of the time. But depending on the relative size of the winning and losing trades the 40% system could be more profitable. In fact, you could be right 90% of the time and still lose money overall!

Apprenticed Investor: The Zen of Trading
The Big Picture
Original source:
The Zen of Trading
Barry Ritholtz, Apprenticed Investor
The Street.com

6/1/2005 11:37 AM EDT
Predetermine Stops Before Opening Any Position: Sign a "prenuptial agreement" with every stock you participate in: When it hits some point you have determined before you purchased it, that's it, you're out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.

The prenup means you are making the exit decision before you are in a trade – while you are still neutral and objective.
Read further:
Trader Mike: Being Right vs. Making Money
The Big Picture: Apprenticed Investor: The Zen of Trading

2 Comments:

Anonymous Anonymous said...

I'm more interested in your overall take on the economy... bearish or bullish over the next few years? I'd say we fall sub 9000

6/06/2005 07:03:00 PM  
Blogger Online Trading said...

Thanks for your feedback! Although, I am not a long term investor and my time frame is usually from 20 minutes up to some trading days, I appreciate your interest and try to publish more posts also about overall look on the markets and economy.

Actually, there are some posts with interviews with fund managers who take a wider look, just look into the Archive. Please, read my post about health care sector (http://trading-online.blogspot.com/2005/05/health-care-safe-haven.html), I think the sector is outperforming the market in the long term.

6/07/2005 05:15:00 AM  

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