If you’re a discretionary trader, you might be developing your exit rules on profitable trades. This in my opinion is one of the hardest things to develop. Exiting losing trades is very easy in a way. Calculate how much you’re willing to lose, enter your protective Stop Order, and you’re done.
But how much can you make? That is the million rupee question. Trend Following does not predict the maximum move, so you are left with looking at the price chart and picking your exit point. (You can be a Trend Following Discretionary trader – learn to read the tape.)
In these markets, it is entirely possible for you to make large unrealized gains in a short period of time. And these large quick gains can be more destabilizing if you are just starting out than consistent small loses. Are you good or lucky? You’ll get your second million rupees for knowing the answer to that question. For example, with $20,000 in starting equity, a $50 move on one Gold contract will result in a 25% increase in your account. Let’s assume these are unrealized gains – the position is still open.
In order to protect your capital, most of your unrealized gains, and most importantly, your positive emotional level at this point, you must pick a spot – a price – after which point you are willing to transfer the risk to someone else.
Example (For illustrative purposes only): Assume the trader is new to trading and it not adequately capitalized to run a system.
Say you are long Gold at $1,100 and it rises 4.5% to $1,150 – what to do? Your instincts tell you to stay with the trend. But you also know that you cannot let a winning trade become a loser. If Gold can rally $50 in one day, it can also drop $100 – a good rule of thumb.
You enter, in this case, a Sell Stop order at $1,135 to exit the trade profitably. You won’t capture the whole $50, but you won’t let it go back to $1,100 either. You will preserve your capital, some of your gains, and you will end up in 100% cash, feeling good, and thinking with a clear head towards your next trade. You’ll have to pick and choose the levels that work for you. I am not recommending these numbers, they are only to illustrate general price movement and what a trader will have to consider.
What NOT To Do
Do not lever up your account at this point. In the early goings, you’re not going to know whether you are good or lucky or both. If you are trading 1-lots, stay with 1-lots. We’ll talk more about increasing your trading size in later posts.
How Professionals See This
Don’t calculate moves in $$$, but see them in % terms. Most of the media reports will undoubtedly report big moves in dollar-terms. Professionals see moves in percentage terms. That’s the fist step to calculating the odds and bet sizes. We’ll cover that in the future also.
If you have feelings of regret because you didn’t catch the top, go take a yoga class and take the day off. Preserving your capital and always managing risk are the keys to longevity.
Great Post!!! Thats very important because at times I feel pressure about trying to make $50 a day, or saying I need at least need to make enough to get my account back to $2000 so let me stay in this trade until it gets there, or something like that. But I see looking at it from a percentage perspective and not being so attached to the money and play it just like it's a business makes a big difference.
Thanks
Wonderful interviews with Sperandeo. I really appreciate his explaination on how stocks and commodities react to political pressures.