A year ago I was working with one of my coaching clients and he sent me an e-mail title, “Forget your Fears.” I opened the e-mail up and he said that he had been trading with a new method. The new method was not to have a stop—period.
Basically, he would find a trade setup and if he was wrong and the trade went against him he would start to work his average by adding more shares into the trade. By doing this he would hopefully dollar cost average and bring his position into a profitable status.
He went on to say that he had been very successful at doing this for about two months. He did say a couple of times he took a lot of heat on a few trades. Meaning he had a couple of positions go deeply into loss territory but was able to average his way out with a small loss. He later explained by not using a stop he was able to “Forgot His Fears” and make more money.
Russian Roulette
In dealing with traders for the last five years I have heard the horror stories of traders using this method of not using a stop and instead averaging their position. I have coined this type of trading, “Russian Roulette Trading.” When you trade this way it is just a matter of time before you take a bullet because there is one in the chamber and that one bullet could result in the end of your career. What typically happens in this type of non-risk management is that you dodge a lot of bullets and some even come real close but one day you eventually get taken out and it hurts bad.
That one bullet or loss could take you weeks or months to make back the loss you had to take because the stock never pulled in or bounced as you expected. Needless to say this trader did not survive and ended up cashing out his depleted trading account.
Losing Is Part Of The Game
The best traders I know personally set their risk before they take the trade and know how much they will lose if they are wrong. Don’t be deceived into thinking you can’t lose at trading. Losing is a part of the game, however, if you control your losses you will live to fight another day. I changed my job title from Trader to Risk Manager a long time ago and I suggest you do the same.
= = =
Learn more about GapEdgeTrading
Related Reading
read another story by Peterson here
