Cutting Losses Early

B

bertie123

Active member
Messages
115
Likes
2
Hi Guys,

I am relatively new to Fx and one thing I can't seem to master is when to get out of a trade if it goes wrong. Do you wait for the stop to be hit or cut the losses before the stop is hit? Any advice would be appreciated thanks.:)
 
bertie123 said:
Hi Guys,

I am relatively new to Fx and one thing I can't seem to master is when to get out of a trade if it goes wrong. Do you wait for the stop to be hit or cut the losses before the stop is hit? Any advice would be appreciated thanks.:)
Click to expand...

With 80 point stop-loss I've seen price come to within 1 point of my Stop before resuming in my trade direction and going on to produce hundreds of profitable points.

Before placing any and every trade you should already know exactly where your Stop Loss and your Target(s) will be.
Not having pre-determined them is foolhardy.
having pre-determined them, stick to them !
Don't let emotion enter into your trades.
That's why i suggest trading longer TFs is perhaps better for newbies.
You get more time to assess the set-up and plan your Exits (don't worry about Entries, they're the easy bit :clap: )
Having made your assessment in the cold light of day before you trade, it is a very amateurish thing to then start playing around with your Stops, taking profits too early, taking lossess to quickly etc during the heat of an active trade.
Place your trade, set your Stops and targets and WALK AWAY FROM THE SCREEN !!!!

I'm going to suggest to Sharky that all new subscribers have this tattooed on the forehaeds before they're allowed to sign up and/or trade :cheesy:

If you analyse the football results, look at the weekend's games ahead and decide to have a bet on Plymouth to beat Torquay do you drive all the way down to Devonto spend 90 minutes freezing your balls off watching the game, the outcome of which you can have no influence over? No, you check the results on Ceefax later to see if you won your bet or not.
Try to do the same with your trades my friend.

Right, your analysis might be pants, and your Stops in all the wrong places, but learning what went wrong will improve your chances on the next trade.
Coming on at half-time and substituting the goalie with a centre forward ain't gonna teach you anything.

good luck, hope it helps,
r_e
 
I always set a final and fixed stop to cover catastrophe but also try to start scaling out when the price action diverges from the picture I had in my mind as to wat it would do before I put the trade on. This reduces exposure to risk as a trade starts to deteriorate. Advice given to always set a stop and always obey it is bang on. There are many ways to succeed at trading but the guaranteed way to fail is to be wiped out. Make it as hard as possible for the market to hurt your bank balance. Alex Elder suggests not risking a loss of more than 2% of your capitol on any one trade.
 
rathcoole_exile said:
Before placing any and every trade you should already know exactly where your Stop Loss and your Target(s) will be.
Click to expand...

Yes!

The hardest thing for a newbie is knowing when to get out of a trade.

The other thing is knowing when to take profits.
 
shadowninja said:
The hardest thing for a newbie is knowing when to get out of a trade.

The other thing is knowing when to take profits.
Click to expand...

Ummmm, aren't those basically the same thing? Maybe I'm being daft, but to take profits you have to get out of a trade, right? :p

I want to correct one thing rathcoole_excile said. His quote was:
"Before placing any and every trade you should already know exactly where your Stop Loss and your Target(s) will be. "
Click to expand...

I would rewrite that to:

"Before place a trade you should know exactly what will trigger your exit of that trade."

Obviously, this singular statement takes into account both stops and taking profits. It's the latter part where I have a problem with rathcoole's statement. Not all trading methods lend themselves to have specific price targets.

Trend following methods are the most obvious example of that. If you attempt to put a price target on a trend trade you almost guarantee that you'll degrade the performance of that system because you'll miss out on the really big winners which are what produce the bulk of the returns.

But even trend following systems have exit rules to trigger when you get out of a position.
 
Last edited:
Rhody Trader said:
I want to correct one thing ratcoole_excile said. His quote was:


I would rewrite that to:

"Before place a trade you should know exactly what will trigger your exit of that trade."

Obviously, this singular statement takes into account both stops and taking profits. It's the latter part where I have a problem with ratcoole's statement. Not all trading methods lend themselves to have specific price targets.

Trend following methods are the most obvious example of that. If you attempt to put a price target on a trend trade you almost guarantee that you'll degrade the performance of that system because you'll miss out on the really big winners which are what produce the bulk of the returns.

But even trend following systems have exit rules to trigger when you get out of a position.
Click to expand...

I stand corrected Sir !! You absolutely correct. Often I don't have a specific target but do have a particular set of circumstances to watch out for as a signal to exit.
Forgive me for over-simplifying things, I was just trying to stress the importance of it all for the newer trader.
To clarify for newer traders - what gets you in gets you out, whether it's a MACD cross, a Stochastic OB/OS hook, a MA cross, whatever. But since human emotion is also likely to affect your judgement during a live trade when you're inexperienced, you should also have a fixed %/pips/points profit target to start scaling out at even if your exit signal hasn't shown up.
Because without doing so a newbie will very often try to override his exit signal only to see a reversal and all his profits pissed away.

Of course another important factor in having a target for newbies is to assess the risk/reward implications of your trade.

Thirdly, having a TP shows that you understand what you're doing, that you realise that there is perhaps Support/Resistance/Fib/magic Number ahead and have taken it into consideration.
 
Some good points made already.
I would just throw in a bit more in from Elder, I think:

When you place your stop, ensure you totally accept the risk it represents, psychologically. ie. You've already decided you are willing to lose the entire value of the stop being hit before you commit to the trade.

Also one from Trader Dante; Place your stop in such a position that should the price move to that level, it means your trade plan / entry is no longer valid.

Edit :- Just read DB's link; say's it all really.


Best Regards,
Neil
 
Last edited:
rathcoole_exile said:
But since human emotion is also likely to affect your judgement during a live trade when you're inexperienced, you should also have a fixed %/pips/points profit target to start scaling out at even if your exit signal hasn't shown up.
Because without doing so a newbie will very often try to override his exit signal only to see a reversal and all his profits pissed away.
Click to expand...

This is basically a contradiction. If scaling out at certain points is not part of a trading system then doing that sort of thing is by definition of overriding the exit signal. Newbies' biggest problems are often failing to stick to their system. You're encouraging them to do exactly the thing which messes them up.

Thirdly, having a TP shows that you understand what you're doing, that you realise that there is perhaps Support/Resistance/Fib/magic Number ahead and have taken it into consideration.
Click to expand...

I don't agree with that at all. If your trading system includes the determination and use of targets, then fine. For those using systems which do not include determination of specific targets, though, identifying them just suggests a lack of faith in and/or understanding of what the system is meant to accomplish.
 
shadowninja said:
So you stay in if you're 500 pips in loss then? ;)
Click to expand...

If my exit strategy doesn't have me out of the position, then yes.

You miss my point, though. I was being a bit cheeky, I admit, but you said "The hardest thing for a newbie is knowing when to get out of a trade. The other thing is knowing when to take profits." What is the difference? Knowing when to get out of a trade means knowing when close a trade. Taking a profit is closing a trade, just as getting stopped out is closing a trade.
 
Yes, I was looking at the two possibilities. I think you're being Mr Pedantic. :p Newbies don't know when to cut their losses and they don't know when to collect their profits.
 
Now, now, you two . . .

All that aside, what I find interesting is the sudden rash of threads (some of which have been dragged out of cold storage) on stops and cutting losses. Sounds like an awful lot of people are being caught on the wrong sides of trades and are turning to stops rather than to learning to determine how to be on the correct side.

Or maybe not.
 
dbphoenix said:
Now, now, you two . . .

All that aside, what I find interesting is the sudden rash of threads (some of which have been dragged out of cold storage) on stops and cutting losses. Sounds like an awful lot of people are being caught on the wrong sides of trades and are turning to stops rather than to learning to determine how to be on the correct side.

Or maybe not.
Click to expand...

My guess is you're not far off the mark. There's been a bit of talk lately about traffic to certain blog sites being an indicator of traders under duress. Folks have found things a bit more challenging, I'm sure. Some are realizing they lack some knowledge. Others are deciding they don't like their trading system and want to find one that works.

As an aside, is it me or has there be a lot less talk about forex "hedging", gridding, straddle, or whatever you want to call those two sided strategies that work in relatively quiet markets but which get killed in trending or wildly volatile ones?
 
dbphoenix said:
Sounds like an awful lot of people are being caught on the wrong sides of trades and are turning to stops rather than to learning to determine how to be on the correct side.
Click to expand...

I think its the sign of all amateurs in trading:

An absolute inability to understand that stops are just an essential cost of doing business as a trader.


"Market Wizards, New Market Wizards & Co.

- Michael Marcus

Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don't stay with your winners, you are not going to be able to pay for the losers.

In addition to not overtrading, it is important to commit to an exit point on every trade. Protective stops are very important because they force this commitment on the trader.

- Bruce Kovner

Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I'm getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn't go there if I am right.

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.

If you personalize losses, you can't trade.

- Richard Dennis

When things go bad, traders shouldn't stick their head in the sand and just hope it gets better.

You should always have a worst-case point. The only choice should be to get out quicker.

The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.

- Paul Tudor Jones

I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.

I am always thinking about losing money as opposed to making money.

If I have positions going against me, I get right out; if they are going for me, I keep them. Risk control is the most important thing in trading.

The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down.

Risk control is the most important thing in trading.

Ed Seykota

If you can't take a small loss, sooner or later you will take the mother of all losses.

I prefer not to dwell on past situations. I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities.

The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance.

I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues.

- Edwin Lefevre (Aka Jesse Livermore)

It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would "let them out even." And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break "shook them out," and prices just went so much lower because so many people had to sell, whether they would or not.

The spectator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day -- and you lose more than you should had you not listened to hope -- to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out -- to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

- Bill Lipschutz

I don't have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don't think you can consistently be a winner trading if you're banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time."
Mechanical Trading Systems - Expert Citations

George Soros - I don't care when I'm wrong. I cut my losses and move on to the next opportunity. It's about how much you make when you're right.
 
BSD said:
I think its the sign of all amateurs in trading:

An absolute inability to understand that stops are just an essential cost of doing business as a trader.
Click to expand...

Or, at the very least, knowing when to exit a bad trade . . . :)
 
Rhody Trader said:
As an aside, is it me or has there be a lot less talk about forex "hedging", gridding, straddle, or whatever you want to call those two sided strategies that work in relatively quiet markets but which get killed in trending or wildly volatile ones?
Click to expand...

It helps, I think, to have been through the '99/'00 market. Loads of deja vu . . . ;)
 
You must log in or register to reply here.

Similar threads

C
Cut losses or wait for recovery?
Replies
15
Views
8K
metrader
M
Old_Bob
Where will we go after the Feds cut rates?
2 3
Replies
44
Views
7K
Rhody Trader
R
S
Cutting Losses
Replies
8
Views
2K
archiemishra
A
M
Holding Bag & Not Immediately Cutting Losses
Replies
13
Views
5K
mpups
mpups
tar
First UK rate cut
2
Replies
39
Views
5K
gooseman
G
Top