Reviewing my trading history, I found that with this one simple strategy, I would have been able to reclaim 76% of my funds that I had lost. You’ve read it in books and probably heard it from several people, but to truly intuit this concept in a rigid trading structure will seriously save your trading account from blowing up.
I call this strategy, the “Mind at ease, break the knees” strategy, aka “200 points max loss”. Points may mean something different from me than it does to you, but think of it as the largest loss you’re willing to take on a hefty trade, like NVDA or TSLA where you may wager only 10, 100, or 1,000 shares. 200 points could mean a $20, $200, or $2,000 loss per each individual trade you’re willing to accept.
What happens when the trade comes close to that 200 point max loss? You cut it off at the knees. It has zero chance of making it to that value. If a trade isn’t working for you, be more inclined to get rid of it rather than holding onto hope that it will bounce back. I learned this concept from Tom Hougaard’s book “Best Loser Wins”, where he hypothesizes the top 10% of traders will hold onto hope when the stock moves in your favor (overriding the fear of losing profits by closing the position too soon and when a trader is in a losing position and delirious about the position reversing).
By getting rid of stocks that aren’t serving us (giving it ample breathing room), we’ll lower our success rate in favor of the few positions that may work in our favor that can hit big.
Step-by-step
- Enter your position.
- Example: Go long 1K shares of NVDA at $483.20 for a total cost of $483,200.
- Set your stop loss.
- Example: You set your stop loss at $481.50 (you could go $481.20 for a full $2K loss but not necessary, that’s your max)
- Move your stop loss as needed. (Always higher, but never lower)
- Example: The stock rises up to $484.00, at this point you can set your stop loss to your entry price of $483.20 or even a little higher. You could choke the stop loss as close to $484.00 but the inevitable volatility will stop you out and you won’t give your trade breathing room to realize any bullish potential in your position.
- Swap your stop loss with a market or limit order
- Example: Maybe you moved your stop loss and the stock is climbing, you don’t need to let it fall back to the moved stop loss, you can instead replace it with a market or limit order to take your profits.
That’s it! You could technically not have a stop loss in place, but be honest: do you really trust yourself? It’s better to have a stop loss in place rather than letting the stock zoom way past your stop loss. We all have nightmare stories where we blew our account up — take the necessary precautions and place your trades with as little emotion as possible, always assuming it can go against you, and accept both wins and losses like a man.