Cutting Losses

Losses must always be cut and they must be cut quickly, long before they become of any financial consequence. After the elimination, the transaction must be, in a sense, forgotten. It must be left out of future consideration completely that there is no sentimental bar to reinstating the position at a higher level, either very soon or at a later date. Cutting losses is the one rule that can be taught with assurance that is always the correct thing to do. However, as a matter of actual application, it requires a completeness of detachment from human frailties which is very rarely achieved. People like to take profits and don’t like taking losses. They also hate to repurchase something at a price higher than they sold it. Human likes and dislikes will wreck any investment program. Only logic, reason, information and experience can be listened to if failure is to be avoided.

An excerpt for the book…

The Battle from Investment Survival

By: Gerald Loeb

Traders Corner

Kerry,

As this seems to be "Equity Curve Week" I thought mine may also give some encouragement. The interesting point is that it was back in August that I decided I needed to review what I was doing and seek some guidance from you. You can hopefuly see the results since then (and it has been a tough time in the markets over this period too of course). The percentage gain is relatively small but that is purely because my work is keeping me very busy and so I have been trading very lightly and so have missed numerous signals.

Trading is now nowhere near as stressful as it used to be. I know exactly the game that I am playing even if I don't play it as well as I could.

One interesting point is that the trades I have been making since August have been almost identical to those I made before. The difference is that my entries are now well defined rather than me just blindly buying the market. Trading really is a typical case of where a chain is only as strong as the weakest link. In my case the weak link was my entries.

Still a long way to go of course but the direction is the right one now.

Regards,

Chris

Traders Corner

I love getting feedback from clients and fellow traders. Here is another email I just received today. Jeff is wonderful guy and a good friend, not to mention a good stock picker. I always pay attention when Jeff mentions a stock. Here shared an email this morning and I asked him to elaborate on the difference in his trading, here is his reply and many thanks for letting me post to the blog.

Hi Kerry,

Here is my equity curve for January. My picks have gotten better, but I have also been more consistent at taking profits. You’ve played a big role in these results. Thanks!

These are the main reasons for my results ( December was also good and I was profitable for 2008 ).

1) I spent much more time on a short list of about 10 favorite stocks and really got to know how they trade and what is and is not out of character.

2) I focus much more on support and resistance on all time frames. I tend to sell as we approach resistance and if we keep going, I don’t worry about it. I’ve always had a tendency to kick myself if I get out too early or if I don’t get out and it drops! That leaves a narrow margin where I’m not kicking myself. Now I’m focusing more on my account goals rather than “being right.”

3) I also like to buy closer to support so my stops can be below that support. I’m also using volume much more to determine if the short term trend is running out of or gaining steam.

4) I am trading smaller with proportionally wider stops so I don’t have to be as precise in my timing.

5) Probably the biggest thing is that I’ve really cut back on questioning myself. There have been many times where my analysis suggested I enter a position but I would talk myself out of it. The same applies to exits. I would see a stock hit a ceiling and stop going up and I was afraid I would sell and be wrong. Now I sell and if it goes up further, no big deal.

Jeff

Equity curve minus impulsive trades

In working with a client today we reviewed the recent equity curve. In doing so we indentified those trades that was not traded based on an indentified strategy. I suggested that he take his equity curve and remove any trades that were impulsive and re-plot the equity curve, keeping only those trades that were made based on an indentified set of rules. Here are the results and his comments. Hi Kerry, I've omitted some of the trades that we determined as impulsive or no strategy trades... Attached is the result.. I've printed it out and it is hanging on my wall now, to remind me what is possible and what can happen if I impulsive trade again. Wessel

Trader's Corner

I just received this comment from a client, I asked his permission to share, so here it is. Keith had a tremendous habit of over trading. He never really over traded from over exposure, but his broker had to love him. I am sure Keith received a Christmas gift from his broker each year. I asked Keith to allow me to share this info and he agreed. When we done his account analysis we found that over half his losses were due to commissions alone. It is called churning ones account. The losses were never that huge, but the losses were many as Keith traded about 20 times more than necessary, never really riding a winner nor riding a loser…just churn and burn. It is very stressful way to trade and a guarantee that one will not make money at this game. Keith has worked hard as he has stayed in touch on a very regular basis. I honestly told him one day that I expected him to give the game up. Keith proved me wrong and has persevered and stayed in the game. I can attest it was not easy and Keith spent a lot of time revamping the way he thought and his approach to trading. Honestly it was like watching a drug addict go thru detox. I wish Keith much success as I do all the clients I work with. Trading is a difficult path to take. It is very rewarding when one finds his/her own. All the best to Keith, and hope some of you find his message as up lifting as I do. _________________________________________________________________________ What a difference in a year... Here are the key points and it may seem so simple, but what a huge impact it has made in my account. Thanks for all the help! I trade less because I have learn to be more patient for my type of trades. I truly understand the type of trader I am and the condition I need for my setups to work. I established written trading rules to follow and have memorized them. I never feel the need to impulsively trade. I know exactly what I am looking for. I manage my time using alerts so I don't stare at the screens. I have learned that's it's OK not to have a trade. Rather than watching every move, I have alerts to tell me when to watch the screen. If I have no alert, I never look at the chart. I am always assessing risk and not profits. Many times this alone has kept me out of several bad trades. If I do not like the risk, I let the trade go without me. My equity curve tells the story and I can determine more quickly when I have a trader issue and need to reduce size. I look forward to updating my equity curve each and every week. I do the 5 largest loss exercise once a quarter. I don't wait for a year. Most of what has helped has nothing to do with a new strategy or indicator. I can't believe how far my trading has come along. I was ready to give up on trading, but your encouragement to implement these simple tools have turned my trading around 180 degrees. I never had a winning year until now. All of these improvements have come from your videos and phone consultations. The one week personal visit was invaluable. That visit alone is what made me realize just how much I was over trading. I always thought a trader was suppose to be trading all the time and always looking for the next opportunity. After spending a week with you and seeing how profitable one could be making only 3 or 4 trades per week was an eye opener. Learning to stop over trading and correctly position size is incredible. I trade less, make more money on my trades that do work, and spend less time. I almost feel guilty at times. Your analogy of having a boss come in and telling me to take the day off for doing such a great job was idea. Now I listen to the boss (Mr Market) if he tells me to take the day off... I am out of here. Thanks for all you do, I likely would not be trading today had it not been from your encouragement and willingness to persist I get control of my trading issues. Prior to this past year, my biggest one total for trades was 57 (yes 57 trades in one day) it would take me 6 months to have that many trades now. On average I am making 5 -7 trades a week. My goal is if I can prove to myself I have a positive equity curve for another year like this past year, I will increase my trading size to full positions. I now have a 5 year plan in place, as I have 5 more years before I plan to retire. Then I plan to trade full time. I feel I am prepared to work my plan and feel in control of trading, rather than my trading is controlling me. Many Thanks! Keith P