Trades on which you only lose a predefined maximum risk % of your account balance are an integral part of my (or just about any) active trading system. Depending on the desired risk-multiple you know how your ratio of wins to losses has to be in order to statistically come out ahead in the end. In my case I have a win rate of around 27% for my 3R and greater wins. This means that I can easily digest 3 stop loss hits before I need to score a 3R win. However I run a capped system so my real wins are oftentimes larger than 3R so I will be fine if only every 5th to 6th trade is a win.

Being able to absorb many stop loss hits allows me to act on opportunity without fear and using that stop loss hit as feedback which tells me if the market is ready or not. Receiving this feedback in real time is crucial because when a cycle started and stocks made moves it is already too late.

As you see a stop loss hit is…

A) a perfectly fine piece of my system just like a 3R win and

B) a important feedback mechanism for me to adjust exposure.

Every piece of a system which works as intended is good, hence stop loss hits are good trades.

The only bad trades are those who exceed your max risk. Even trades where large paper profits vanished and then go on and even hit your stop loss are actually good trades as it is simply a stop loss hit which can easily be digested and is nothing to worry about. You’d be upset but you also know that this is fine. For this to work you must trade a system and have to trust your expectancy number and ignore your account balance. If you are fixated on your account balance, a trade where you give back all profits can indeed harm you fragile trading mind. Always trade a system and if that system has a positive expectancy then you must start to ignore the account balance. Once you see that your system is not profitable because wins are way too rare in between the steady stream of stop loss hits, you probably have to change/tweak your setups and stop loss placement.

The Blueprint: Your goal as a trader is to create a steady stream of stop loss hits which never exceed your maximum risk and then work on increasing the frequency of wins in between. Once your frequency of wins is where you need it to be you can start to put some more icing on the cake by letting those winners run more and more. In any case you want to maintain the integrity of your base risk multiple system and truly treat the profis beyond your goal risk multiple as extra. This is what I do in my capped portfolio approach. Meanwhile statistics will tell you how to adjust/tweak your base goal risk multiple to make it easier to maintain that profitable base system.

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Disclaimer: This article is my opinion which stems from my own experience gathered trading real money in the stock market. It represents my style and it fits my personality and risk allowance. More power to you if you are a net profitable trader despite violating everything that’s written above!

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