I constantly test my trading strategy as I evolve as a trader. This is a necessary skill to have because as you gain experience (meaning make mistakes), it’s worthless unless you apply what you’ve learned to your future trades. So I’ve drafted up some rules that you can find here. The two most important rules I’ve employed is to cut your losses at 8% always, and to never let a winning trade turn into a losing trade.
The first rule comes from IBD, however, it is very difficult to adhere to! There are times as a trader you know you’re correct, but the market moves against you. Now I used to complain about the market being wrong and hold on. However, my new, disciplined approach knows to put my ego aside and cut my losses. It’s all about surviving another day and having money to trade tomorrow. Those devastating losses need to be avoided if you want to be successful. Just realize you made a mistake and get out.
I created the second rule because of the many trades I’ve entered that turn profitable, just to see them reverse and I close them for a loss because they trigger the 8% loss rule. So this next rule addresses this issue and states that once a trade is profitable, you move your stop losses so if it reverses against you, get out to break even. Or stated another way, never let a winning trade turn into a losing trade. Sometimes it can be frustrating, but it works well I’ve found. Knowing you’ll never incur a loss when a trade is profitable is a great feeling. The one bad thing is that sometimes you get whipsawed out of a trade, however, you just keep an eye on it and re-enter it if that’s the case. You know if it’s a whipsaw because of the volume.
Every trader needs to develop their own rules that matches their strategy, and these rules are constantly evolving. Do you have rules you made? Do you ever break them? Let me know in the comments!
Christian, I’ve been following you on Stocktwits for a while now and can really relate to your trading methods. I had a question about your trading rules since I feel the need to come up with some unique rules for myself. Do you have a certain rule for your stop loss to never let a winning trade turn into a losing trade? This is something that I struggle with on a regular basis and was thinking about setting up rules where after I have hit X% in profits to keep my stop loss at a certain percent of my profits (~66% for example). So if my stock is up 20%, to have my stop loss at 13.2% profit, unless of course there are some critical changes in the stock/market.
Hey Deven,
Yeah it’s a grey area that basically comes down to your comfort level. Sometimes after a run up and I take profits I’m comfortable letting the stock come down to the breakout region to get support before heading higher. Some people would not be comfortable holding a “loss” like this, but if it’s on low volume, it’s healthy and it prevents me from getting out of a position that has a potential to be a big winner. It’s the worst to sell a stock on a LVP (light volume pullback) just to see it push higher days later. What are your thoughts on it? What’s your comfort level?
Thanks for the following!
I agree with everything that you said. I hate to see a winning trade disappear but at the same time I don’t want to cut off my profits. From a comfort standpoint I am able to take some big hits before selling a stock; something that isn’t technically a good thing, but can keep you sane in the market. That’s the reason I really need to find what a good stop % is for me.