DTM: Decisive Trade Management and Using Trading StopsIt has often been said that there is only two ways to get hurt really bad on a stock trade, getting caught in a "death spiral" by not using DTM: Decisive Trade Management in
way of stop loses and having a stock halted on you. Halts you have zero control over. Death spirals are of your own making if you do not practice use of stop loses.
Very simply stated Decisive Trade Management is keeping a stock form moving to far against you when trade goes bad. It is not impossible to have 5 or 6 out of 10 trades lose money and still be profitable for net of total 10 trades. What you must do is keep your loses small and manageable and try to maximize you winners. This is done with proper use of Trading Stops and a strict discipline in using them.
Capital Preservation
It is my firm belief that capital preservation is one of, if not single most important thing a trader has to concentrate on. It is also my belief that it is always better to error on side of safety or caution, in general this all comes under DTM: Decisive Trade Management.
Stop loses and discipline to use them are part of DTM
When you enter a trade, you should have both a possible profit figure or gain that you hope to obtain and a downside loss that "you" are comfortable with if play turns against you. Only "you" can make that decision as to what these limits are. You are only one that can determine you risk tolerance and ability to absorb loses on an individual trade. Factors on which these limits are determined include amount of money you have in your account, your experience and knowledge of particular stock, news or events affecting trade and over all market conditions and possibly others. As an example, a trader trading a $250,000 account is more then likely better able to take a $2.00/shr hit on a stock then trader trading a $25,000 account. Some traders will consider just how well they may have done on a previous trade or number of trades and let stock run a bit more against them if they have already made a few good trades or if they need to make up for a bad trade or two. This is very risky. I personally don't like to see risks taken in direct relation to previous trades. I would much rather see a plan that is in effect straight across board. This goes along with my thinking that ever trader should have a trading plan and then you work your plan. (See Trading Plan: Everyone Should Have One) But human nature what it is, I'm sure balancing trades against one another is probably being done all time.
As a personal guide, in a market with very tight trading ranges, I'd think twice before letting a sock turn down by 50 cents or so. That is a very tight stop loss for most part; again this can be flexible depending on your knowledge of stock and its trading habits coupled with your own tolerance for loss. On an $85 stock, 50 cents is not all that much, but on a $9-10 stock it's a much larger percentage. Markets trading in tight ranges and lacking volatility make it much more difficult to recover loses if follow through is just not there. If average profit in a trade is 25-75 cents, then letting one get down on you a buck or more is going to wipe out most if not all of previous gains on two or three plays. It can take that many trades to get back to even.
