Tactical use of trailing stops

I meant to say something earlier this week. If you wouldn’t mind, take a minute or so and go to whatever platform you are listening to the show on and consider leaving a review. It doesn’t have to be the Oxford English Dictionary, just put it a couple sentences, something that you think resonates with you while you benefit from the show or how you benefit from the show and how other folks might benefit. That helps me grow the show, grow the audience, even though we’re going to be moving over to other platforms that would actually help us grow the show, it’s still all adds up. Also, if you’re new to the show, thanks for being here. I’ve been given away the audiobook version of my book, The Inner Voice of Trading to folks to help them with their trader psychology and their emotional intelligence around managing risk and trading.

And today I want to follow up with something I said yesterday about having to handle all these rules. I think with some of the software, you can use trailing stops to limit the pullback. You might get knocked out of a lot of trades, but if your goal is to pass some kind of trading test, you want to limit your drawdown because you might have a $6,000 profit target with no more than a $3,000 drawdown. You have to say to yourself, okay, unless I put on the next trade and it grows to back up to $110k, then my equity stop is at $107k and once I trade below $107,000, I get knocked out of this evaluation period. So then you have to figure to yourself, how are you gonna break up that $3k? Because it’s not any, it’s no longer a [%-based] risk unit based on a $100,000 or $110,000.

It’s really how many trades can you put on before you exhaust that $3,000 trailing equity stop before you get knocked out? And that kind of goes against what I was saying of how most people do their trading is they’re not risking a flat dollar amount. That’s the bullshit tier stuff. You don’t need that. So again, it sets up a bad habit that you start thinking in dollar signs and then not percentages. And you need to think in terms of percentages. First of all, it’s what the pros do anyway. And two, you want to be able to be, it helps you detach emotionally from each and every trade. If you start thinking in dollars and you come from say, a working class background, you can start to say, wow, there goes a $500 loss. Here’s all the different things that I could have done with that money.

I hear that quite a bit actually. So unfortunately the rules are set up the way they are and it’s not my program to change the rules, but it does to me set up an unrealistic way of managing risk. So think about using trailing stops. I don’t say stop loss because if you’re making money, you’re still up. You can basically put a trade on and say, okay, look, have, if I have 10 different trades with a $300 loss, I will get knocked out. So maybe think of it that way. And then when you put trades on, think about risking smaller amounts of capital. Admittedly, this does a few things though. It gets you thinking about timing the market and it gets before you might not have any skill on how to do that. And it also gets you to think about from day one, you start trading with scared money and it’s hard to make money when you’re trading with scared money. You have to be ready, willing and able to lose in order to make right. So I think when you do this, you would want to very, very quickly put your stops in and then adjust your stops as fast as possible. This way, whenever there is a bit of a pullback, you don’t get knocked out. So then again, if your account goes up to say $112,000, your new stop on your equity is $109,000.

So you have to definitely ratchet up your protective stops on these types of trading things so that you preserve your capital at that point, or what I would call your equity stop is like a trailing $3,000 from any previous high. So they don’t allow for a drawdown that exceeds $3,000, I guess is what I’m saying. So you have to be super careful, even though you’re making money, you might not pass the evaluation period if you eventually have a cumulative drawdown of more than say $3,000. So adjusting your protective stops and putting those things in is really paramount importance in order to pass these evaluation tests. Again, it’s not necessarily how I would recommend that you trade based on dollar amounts, but you have to do what you have to do if you don’t have any trading capital, and this is one of the ways where you want to kind of get it done. Okay, folks, that’s all I have for you today. I’m done for this week. I’ll see you Monday. Have a great holiday if you’re in America, and if not, we’ll certainly be having a piece of pumpkin pie for you and I’ll see you Monday. Take care.

This is a computer generated transcript.

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