Keep Calm and Enter Your Stops


The Sugar trade I mentioned a few weeks ago that almost tripled one of my accounts had a lot of things going on inside it. But making the money was a symptom of several factors, some of which might surprise you.

Of course, it goes without saying that I was powerless over the move in Sugar itself, so the best thing I could have done is what I did do: add some risk to my account and enter a protective stop to knock me out if I was wrong. I should also add that I had no clue the trade would develop even remotely the way it did when it started out. Technology-wise, I used EOD data from my broker using daily and weekly charts (and I still don’t have real-time data – 10 years and going strong).

Yes, it is frustrating to put a trade on and get knocked out, but I’ve come to LOVE frustration. See, in the barometer of my emotional constitution, the feeling of frustration comes well before the feeling of despondency or paralysis (or the palsy phase from taking Lemon Quaaludes, but I digress). If your INTENTION is to trade like a professional, then get used to losing money: losses are part of the business.

By entering my protective stops, although I don’t want them to get hit, I am making an investment in my emotional well-being. I look at it as the “lesser of two evils.” Of the two, I’ll take frustration over despondency every day — that’s an easy trade. I’ll come back to the market tomorrow with a clean head: no regrets of the past and no fear of the future. There will always be another trade, maybe even a second attempt at the one I just got knocked out of.

Besides adding to my winners at prices that were upwards of 50% greater than my initial entries, I used something else that I believe was the key to the trade. I let go of trying to impose my will on the trade. I surrendered to letting the market do all the work. You should learn to do that too – that’s what they’re there for.

The key to making huge gains has virtually NOTHING to do with your entries. It has EVERYTHING to do with your keeping your ego out of the trade in order to avoid messing up a good opportunity.

I sat on my hands for 4 months – I held a long futures trade in SBH for 4 months and did not have to roll contracts either. Please think about this while you’re looking at whatever intraday “cloud-pattern” charts you’re looking at. My guess is that if this describes you, you’re only looking at 3-6 names so you have to see if you can somehow find a trade when there otherwise isn’t one.

If your trading desk makes you go home flat – YOU’RE AT THE WRONG PLACE. Don’t let your B/D or desk manager’s poor risk management decisions affect your otherwise excellent trading. Their balance sheet is none of your business and not your problem. If you can’t take winning trades home, it’s time for a new trading firm. All you’re doing is being taught bad habits.

You and I are lucky enough to get into a winner in the first place — which in the short run is RANDOM, not skill. It’s bad business and deplorable investment finance to sell a winning position before it ripens.

In order to make money, you need to have risk in your portfolio. And for the biggest moves, you need to take the risk home each night, and also over the weekend(s). This is indisputable. Michael Marcus didn’t make 3-4 digit percentage points per year looking at intraday charts or making a cool $2.50 day trading, double-clicking his mouse, or blasting his “hot keys.” Whatthef*ckever…

Put a protective stop in at a level that you can handle emotionally and financially, and let the market tell you when the move is over. Otherwise, you’re in your ego. You cannot pick tops, so why would you cut the branch of a tree off when you’re sitting on it?

I like to think of a position in my portfolio as a subsidiary of “Me, Incorporated.” Each one of them needs to make me money: the losers are closed down and sold, and naturally, I invest more capital into the subsidiaries that make money. How else would I scale my business?

If you feel empowered by taking gains manually, the feeling of doing so is probably greater or more important to you right now than the feeling you get of making large gains.

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  • Tim Thomas

    “If you feel
    empowered by taking gains manually….” This is me, 100% but how does one reach specific equity size
    targets without taking profits? I realise the need to allow the trend to
    exhaust itself but the trend doesn’t care about my account size.
    Also, when you say when you say the key to making huge gains isn’t in the entry
    it’s in the letting go of oneself…. I’m not clear on this. Entry level plays a
    large part in my ability to stick with the trade, as it is with everyone I’m
    sure and the more often you get an entry at a discount, the more often you’ll
    be able to allow the trade to develop and potentially, give you those huge
    gains. I’m not saying don’t be mindful of your ego but surely entries play a bigger
    part than you suggest?

  • martinkronicle

    The market determines the price targets, not traders. That’s an ego proposition. All you can do is raise your protective stops for longs and lower them for shorts so that if the market turns around, you’ll get knocked out for a profit.

  • Tim Thomas

    Relinquishing control and developing patience are two things I’m focused on developing. It’s very difficult because they’re so foreign to me, not impossible but with meditation and my imagination I’ll get there. Thanks for the insight, Martin always good to read your thoughts.

  • martinkronicle

    You are still in control by entering both your protective stops, and your stops to add to your winners. Your stops are at work even if you’re not watching the market.

    Looking at the screen all day is a ritual that comes a cost. It’s might be fun, but you kill a great deal of time that you could otherwise be using productively.

  • Tim Thomas

    I used to day trade, it reinforced the belief I had that I needed to clock in and clock out to justify what I was doing. It was very draining and didn’t benefit my account in a meaningful way but my broker was happy. In hindsight it’s was an ego-trip. However, I do still check price during the day and haven’t learnt not. I’m trying to shift my thinking and framing, being open to new behaviours and thinking but without being clear what actually that means… I hope the openness allows it to come to me.

  • Good read, Michael. What are your thoughts on leaving stops in the market overnight in markets other than Forex? Leaving stops in the market in Forex makes sense due to international event risk. However, I’ve noticed sometimes there are these crazy overnight movements in grains, softs, etc but then by the time the normal market opens prices are back to near the previous day close. What do you think? Thanks!

  • martinkronicle

    IMHO, it doesn’t happen enough to warrant NOT entering them overnight. If you find you are getting stopped very frequently, consider trading half the position size and giving it 2x more room to the stop price. You’ll have the same risk.