I finally realized the importance of a STOP LOSS

After 3 and a half years of stock trading and investing; spending countless hours and nights poring through financial reports, stock charts, reading tons of books and attending numerous stock trading courses. Endured lots of criticism and explanations from eager relatives that stock trading and investing will never be profitable and that I will lose all my money in the long run.

Then came the roller-coaster ride from loss to profitability and back to loss and then some more loss when I tried to make it back as quickly as possible, at the lowest point having a drawdown of more than 250K of the money I made doing business. It was almost all the money that I had ever made through business and because of that, I spent countless sleepless nights worrying about my financial future. At the very bottom, I almost succumbed to external pressures to give up on trading and almost believed that trading is something that will never make money.

However in the process, I learnt a great deal about myself; my weaknesses and strengths and why I lost so much trading. Most importantly I learnt that trading is something that I will always want to do.

I spent a lot of time in the last month of 2009 doing research, especially reviewing my past trades, and found some really surprising facts about my trading. Of a total of 223 trades that I made trading the stock market (18 more if you include my forex trades and a lot a lot more if u include my forex paper trades), 142 are profitable trades and 91 are losing trades. (I might scalp in and out of a trade but I’ll still consider the total trades as one trade.)

Of course, I spent much more time reviewing my losing trades (I shall not put any actual numbers here) and I realized that if I put a 10% stop loss to just 6 of my largest losing trades, I could reduce my losses by 60%. And of these 6 losing trades, only 1 made up 30% of my total loss for the year. And most importantly, if I had put a 10% stop loss to just these 6 trades, it could have turned a huge losing year to a reasonably profitable one. I finally can appreciate the great importance of setting STOP LOSSES.

I also realized that for most of my trades, I do not have a clear stop loss. The profit target is usually clear, but the stop loss is often not considered. Hence, I had modified my trading so that there is ALWAYS a clear stop loss.

Recently, I also realized that timing is an important issue especially with options trading. Hence I will also have a timing stop loss. If the trade does not move in my direction within a specified time, I’ll also exit the position and wait by the side lines. I’ll rather miss out on a good move than to be stuck in a bad one. With the huge universe of stocks to trade, there will be more than enough opportunities to trade everyday.