Hi Guys, hi from Andrea Unger.
I want to discuss a trade that has been sent to me by email by a friend of mine.
Well, this trade was an entry on EUR/USD on Monday with the intention to close the trade on Friday within 5:00 p.m. no stop, no take profit and only an evaluation of the third day plotting the Bollinger Bands to see if the prices were inside the envelope or outside.
My first answer was: “Hey no stop is really dangerous!”.
This guy argued that he did not place a stop loss because he substituted a stop loss with a time stop as he said: “You Andrea suggested to do!”.
I did not suggest to substitute the stop loss with a time stop, I said that if you don’t use a fixed or percentage stop loss you should at least use a time stop intended as “don’t keep a losing position open, hoping, but close it with a plan” and the plan, in that case, was a time stop.
In principle this is fine, but if the reason to use a time stop is that I don’t want to be stopped out, it turns out to be wrong again.
If you don’t want to be wrong don’t trade!
The problem here is that there was a very weak plan behind the whole set up.
The plan was to jump in, wait till Friday and exit.
He said that he did the trade again, all these trades actually had been made on a demo account, so no monetary harm was there, I’m happy about that, the second time he said :”I entered the same trade and immediately market went against me, Monday, Tuesday…on Thursday I saw such a big loss that I decided to stop the trade, close the position not to withstand such a huge loss and the risk of an even bigger loss, but it was wrong because on Friday the market moved back again in my favor of what was the open position, and the original position would have been closed even with a small profit.
“So you see, my decision to sit and wait till Friday was the right one !” No, it was not!
This was just a pure coincidence.
Here we have a number of problems and they are all related to the plan.
The plan is very weak because there is no reason to open the trade, actually, he said the reason was about his instinct.
He said: “I’m trading after my instinct!”
This is fine if you have this talent, but in my humble opinion instinct can be good for a very short time horizon, not for 4 days!
If you have an instinct for four or five days you are more like a magician rather than a trader in my opinion.
So instinct is good for a short time and for 4 days you should try to have some setups, but the setups were not there and the plan to close or the time stop not to be stopped out before is one of the worst enemies of the traders.
“I’m not willing to be stopped out so I don’t place a stop loss”, this is the weakest reason not to place a stop loss and the first time he said that he was not even aware of the size of the position.
He entered with a full load and he was not aware of what that full lot would mean in terms of money change in his account.
This means first of all a weak knowledge about the instrument, second, he did not evaluate how much the market could actually move in those four or five days.
If I enter and wait for a number of days I should at least check historically how much the market is likely to move or can move in this time period so to evaluate what could be the risk of the position, positive or negative opportunity, positive risk or the loss in terms of negative risk, just to have an idea because obviously, things will never happen again as they did in the past, it can be worse it can be better, never the same, but at least I see what has been possible in the past so I know that things can happen.
Furthermore, a second time when he said that by desperation he closed the trade on Thursday, this means that he did not evaluate again the risk but also in case he did evaluate the risk, he was not aware of the psychological impact of that risk in his portfolio.
He was not aware of how much he could cope with such a losing position and he did the wrong thing because he closed the trade, this was wrong because he was not following the plan.
The plan was weak, but still, a plan was there, but that plan was too weak because the plan did not include all the information which should be there.
So when you build a plan you should first of all, have a good reason to enter a trade; second try to put together the different scenarios and the reaction that you will take in case of one, two, three of the scenarios, so that you know in advance what you should do when a certain thing happens.
This guy also said that he could not follow the trade in the afternoon, because he was working, so if you trade by following your instinct you should always be there again to be ready following again your instinct when you see things do not go as you wished.
Keeping the position in a blind environment for half a day is actually too dangerous.
This was a demo trade so no problem at all, but the point is: “Never think to be right with a number of 2 trades because this is too weak and consider losing in trading, you have to consider losses as part of the trades.
Losses are an important part of the trading results, you have to accept them.
If you don’t accept losses please don’t trade, because if you don’t accept losses you refuse an important part of trading.
That’s it guys, see you next time, ciao from Andrea Unger.