Trading is MENTAL. You have to be a disciplined computer, executing what you decided for yourself before you take a position. Which includes executing the “Mental” stop losses the moment it hits it in the market. How can one do that?
Primer on Self-Worth
Starts with Accepting that if stop loss gets hit, you are not wrong. You are still the same person, and deserve the best in life. Don’t hate/ scold yourself. No point in getting angry or sad. Market is like your Boy / Girlfriend. They have their own mind so does the market, and trying to control them with your expectations is sure way to misery. Same with the Market.
Ask this, will I like myself if the stop loss gets hit? Then ask, will I be still in the Market if the stop loss gets hit? Third and finally ask whether have I backtested the pattern, and know the statistics and probability pattern?
Having a Stop loss is a discipline, like brushing our teeth in the early morning. Every activity in life must have a stop loss, not just your trade. Whether you are proposing a girl, or risking your job by taking an entrepreneurial endeavor, start a bar fight under influence or going to war. All needs stop loss. Hope you don’t stake your entire account as stop loss on a single trade.
Lesson in Probability
The above questions helps to psychologically simulate the loss that stop loss brings. You can feel it and decide whether that much loss can be bearable. Then take the position in the market, with the stop loss in your mind. When you find a pattern that seems to fit all the bullish features, market still has the last word, not you, me, exchange or the broker.
The same pattern might arise 10 times out of which 7 times it would have been bullish. That is 70% probability (which is really a competitive pattern, and imaginary) Thinking in this way, you should conclude that if you see same pattern, and if you take the position 10 times, there is 30% chance that your stop loss will be hit. That is 3 out of 10 times of trading the same pattern.
The stop loss getting hit 3 times can happen in a row, or distributed over the 10 times you are taking the position. Do you see, what I mean. You have to see, and feel the probability. Lets assume your stop loss brings 500 INR loss for one time hit. Can you see the market hitting the stop loss 3 times or more in a row, and you still liking yourself? Can you see the “Red Losses” in the position and still go on about your daily tasks? Love yourself? Be patient? Please read again and think, I learnt this hard way and started following position sizing.
I have shared about position sizing that I read, take a look at that. That idea gave me the break I really needed in the market. I am grateful to many authors, whom I may not even come in contact with.
Even if you are correct in seeing the pattern, even if your research is perfect, even if you have worked hard, your stop loss will get hit if you don’t give sufficient space for the pattern to work. If the market hits your stop loss, kill the trade, exit it mercilessly and safeguard your capital. Then feel satisfied that, you followed your system. Even though you made a loss.
Relying on stop orders the brokers provide is important when you begin trading. Use them. They are like training wheels on your bicycle. Drop them, if you want to go faster. You will have accidents, bruises, bone fractures… Hey, you want to be free right?? You wanted it… Be disciplined and you will become the champ and free… One day. We all become The Champ one day.
PS: Do you watch Holly/Bolly/Tolly/Kollywood movies or series? Where heroes/ heroines take unwarranted risks, and come out best. Nope, that would be called reckless. If your half monk, still your emotions and feelings both of which will play on your rationality. Be mindful, learn being mindful. Dump your netflix, prime or whatever and Start Reading loads of books, loads of them…