The Most Important Rule - Cutting Losses
Let's face it. We cannot be right all the time. This is the reality of trading. But we can limit our losses when we are wrong by having a stop-loss in place. If our stop-loss has been hit then we need to cut our losses. It is difficult to do but we must do it to make our overall trading result positive.
The question is where do we place our stop-loss? There are 2 approaches - technical or a fixed percentage below the entry price. My choice is to apply both. We determine the technical stop from chart analysis. Next we calculate the stop-loss based on a fixed percentage below our planned entry price. Applying both approaches means we will only take the trade if the technical stop is not beyond the "percentage" stop. What percentage below the entry price should we limit our losses to? This is a personal choice. I have chosen maximum 6 % below the entry price, which would translate into 7% below the entry cost after including the brokerage fee etc. I have set it lower from 6.8% previously. I am somewhat influenced by the 7-8% rule set by William O’Neill. It has worked very well for me where I am able to limit my losses to maximum 7% below my entry cost.
Technical analysis can help to identify potential recurring patterns to put the odd of being right in our favour. With the discipline to cut our losses short, we can make our losses less than our gains, and, with technical analysis to make us more likely to be right than wrong, our overall result will be positive.
Disclaimer:Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
The question is where do we place our stop-loss? There are 2 approaches - technical or a fixed percentage below the entry price. My choice is to apply both. We determine the technical stop from chart analysis. Next we calculate the stop-loss based on a fixed percentage below our planned entry price. Applying both approaches means we will only take the trade if the technical stop is not beyond the "percentage" stop. What percentage below the entry price should we limit our losses to? This is a personal choice. I have chosen maximum 6 % below the entry price, which would translate into 7% below the entry cost after including the brokerage fee etc. I have set it lower from 6.8% previously. I am somewhat influenced by the 7-8% rule set by William O’Neill. It has worked very well for me where I am able to limit my losses to maximum 7% below my entry cost.
Technical analysis can help to identify potential recurring patterns to put the odd of being right in our favour. With the discipline to cut our losses short, we can make our losses less than our gains, and, with technical analysis to make us more likely to be right than wrong, our overall result will be positive.
Disclaimer:Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and information presented in this blog.
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