Trades Should Quit

23. Jun 2014

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Trades Should Quit

  1. The power of quitting while you’re ahead in trading should not be underestimated, but unfortunately it often is.
  2. At Netpicks we really take this to heart and as part of our day trading rules, we clearly outline in our trade plans how many winning trades we can take before stopping for the session.
  3. I want to outline a few ideas about the power of quitting (POQ) as there are some people who still don’t “believe” in it as a useful principle.
  4. For those who don’t buy into the idea, quitting while you’re ahead simply inhibits your ability to pull profits from the markets when they’re moving in a favorable manner. Why on earth stop when there’s money to be made?
  5. And it’s quite counter-intuitive to the idea that markets are changeable and therefore you should try to take what’s on offer – good or bad. You should stop when the markets tell you that they’re not willing to give any more.
  6. In an ideal world, this definitely makes a lot of sense. But markets are not ideal, the humans who trade them are not ideal and even trading algos are not ideal (as they are designed by humans).
  7. There are two facets to this problem – technical and emotional. Whether you trade manually or automated, you’ll be susceptible to both of these to some extent.
  8. There are some specific reasons why as a trader you might not want to keep pressing the gas pedal in all circumstances. Of course there are some days where you can finish for the day with an awesome P/L, but most day this isn’t likely.
  9. The fact of the matter is that most markets don’t trend for the majority of the time. For intraday trading there might be one or two good moves to take advantage of per session.
  10. When a market has made its moves for the day, getting involved in the chop isn’t likely to generate more ticks – quite the contrary.
  11. Now if you’re into stats and probabilities, you’ll likely be thinking that each opportunity is discrete and has an independent probability. At least this is an easy way to view it and it’s not actually the wrong way to go about trading at all.
  12. But if your strategy is trying to capture a move and a move has already happened, doesn’t that actually impact upon the chances of the next trade being successful?
  13. So you’ve got to think very carefully about this and if by continuing to trade past a certain profit point, time of day or even a particular technical signal, your chances of winning on the next trade are as good as they were at the start of the session.
  14. If you don’t currently understand the power of quitting while you’re ahead, I’m sure you will do at some point in the future.
  15. I can’t tell you the number of times that I’ve made some good profits early on in a session, kept trading, lost some money, made it back and finished on a similar amount of ticks for the day.
  16. This is commission churning at best and emotion churning at worst. And this is if you are even able to get back to your peak P/L.
  17. If a trading loss has made your trading become emotionally charged and the market that you’re trading has changed its behavior, you may not recognize this in time.
  18. Taking a few decent winners and then giving it all back often portends to ending up being down for the day.
  19. If this has ever happened to you, you’ll understand just how gut-wrenchingly painful it can be. One session like this doesn’t usually happen in isolation either.
  20. Building up the emotional strength and capacity to deal with negative situations – losses, errors or missed opportunities for example – can have a huge positive effect on your trading and your growth as a trader.
  21. By understanding and embracing the power of quitting, you can support your personal trader development. Not only that, but you’ll likely see some gains in the momentum behind your trading capital growth –
  22. and a smoother equity curve means increasing position sizes and a greater potential for return.