Capping your losses

At this month’s Meetup, we will be discussing several key principles to successfully trading the intraday timeframe.

One of the most important principles which is applicable to all traders regardless of timeframe is the necessity to cap your losses.

One aspect of trading that attracts a great many traders is the freedom that trading can afford.
As an independent trader, you have no boss – There’s no one there to tell you what to do, how to do it, or when to do it.

This virtue turns out to be one of one of the greatest obstacles for many individual traders to master to achieve any kind of lasting success.

How many of times have you had a string of winning days just to lose all that hard earned money because of 1-2 trading sessions where you lost control and gave all that money back if not more?

Not only is the scenario damaging to your PnL but it is terribly damaging for you psychologically and destroys your trading confidence.

At the end of the day, this is where being an independent trader has its drawbacks.
Institutional traders have risk managers.

Proper risk management dictates strong rules around the sizes of losses that are allowable.  If you go over your max loss you’re cut off. Break your risk management rules and those are grounds for termination.

As independent traders we are our own risk managers.
There’s no one to tell you not to overtrade, when to take a break, or when you just need to stop.

And here’s the challenge.

All of us intellectually know that we need risk management rules and that we need to follow them with discipline however trading can often trigger powerful emotions that cause us lose our discipline and self-control which leads to impulsivity and behaviors like revenge trading.

So knowing what we know about this obstacle a great deal of thought, foresight, and diligence needs to be structured to create safeguards to protect ourselves from ourselves.

Here are several suggestions for you to consider to cap your losses:

  • Institute rules around your maximum dollar loss.
    • What are your goals? What can you expect from your trading system? Now set maximum daily loss, maximum weekly loss, and maximum monthly loss amounts. What will you do to get back in the game after hitting one of your maximum stop losses?
  • Set loss rules around how many consecutive losing trades you are allowed.
    • Losing streaks are a lot more common than most of us realize. If you scrutinize your past trades I would venture that you will find that capping yourself to a certain number of consecutive losers will save you a lot of money and emotional pain.
    • When you or your system are not congruent with the markets trying to trade your way out of it rarely ever works.
  • Find an accountability partner.
    • This could be a mentor, a fellow trader, a trusted friend outside of trading, or even your significant other.
    • Check in with this person regularly with the status of your risk management and give this person the authority to take away your trading privileges if you can no longer objectively do it yourself.
  • Trade mindfully.
    • Cultivate a practice of trading mindfully and recognize that trading has a lot more to do that just trade management but also self-management.
    • One of the most important traits for a trader is self-awareness.
      Trading can sometimes be very emotionally and physiologically stressful.
      The regular practice of checking in with yourself to see how you are feeling physically, how you are feeling emotionally, and what you are thinking can often times prevent triggers that may cause you got to go psychological tilt.
    • What will you do if you recognize that you have gone on tilt? Plan for this eventuality and give yourself permission to physically remove yourself from the monitors.

I hope you carefully consider these suggestions and I challenge you to take your risk management seriously.

As the old adage says, the best traders are the best losers.

Look forward to seeing you at the Meetup on January 24th where I’ll be sharing many more trading principles for success in the New Year.

Capping your losses

by editor time to read: 3 min
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