It’s Monday morning! That means back to work for most of us. The stock market is still in no man’s land, so deep underwater it’s looking like the NSYE has moved to Atlantis. Here’s the 5 minute Chart of the S&P 500 trading well below the 15 minute opening range:
I’m not a day trader, but conventional wisdom states that you shouldn’t go long unless price is above that opening range. I think I’ll start looking at that more often. Why not? It’s fun to look at intraday prices and to watch things move.
Anyway, I’ve been thinking about trading all weekend. Duh. Like that NEVER happens. And I was specifically thinking about axioms in other areas of life — you know those little sayings that sound like total cliches but actually do have meaning?
Eat less, exercise more is a huge axiom in the weight loss community. A one-two punch. I would probably change it to eat healthy, exercise more — but that’s just me. The point being here is that this one axiom could do more people more good (if followed) than all of those crazy diet and exercise books out there.
So why don’t people follow this advice? One word, it’s hard. It’s hard, and people want to believe there’s a better/easier way. A way that doesn’t involve so much…work. Guess what — there isn’t!
So I started thinking about trading and wondering if there is a similar axiom in all of trading that, if followed, could make a world of difference in everyone’s trading. An lo-and-behold, there is! And it’s this:
Cut your losers short, let your winners run.
It’s everywhere, quoted by everyone, and it sounds so simple. But guess what — it isn’t! Why do you think there are so many books on trading? Because we all think there has to be an easier way. A way to circumvent our caveman desire to lock in profits and to hold onto losers until they turn around. I’m sure this one bit of internal wiring has caused more trading grief than all of the other problems combined.
So what does it mean to cut your losers short? And what does it mean to let your winners run? Well, that’s up to you to decide based on the parameters of your system. For a day trader, it might mean cutting losses at -1% negative moves. For longer term traders it might mean -8% moves get cut. I have systems that have -25% stops — but the winners have +75% targets. So they make money.
One great way to manage this is to stop thinking terms of percent and think instead in terms of VOLATILITY. How much does the stock you’re trading move on average? This is called the average true range of your stock. Set a stop at 2*ATR and your targets at least 2-3 times greater than that number.
This way you can treat all stocks on all time frames the same.
But whatever you do, from now on, please eat healthier and exercise more and cut your losers short and let your winners run!