Death by a thousand cuts – I love that analogy but experiencing it is very painful! There was a stage in my career where I actually experienced it and reading the book “Hedge Fund Market Wizards” by Jack Swagger it just brought back the memories of it, so I thought I’d share the hope that can save them the pain!
So let’s get into it, let me explain:
To enter a trade, for example because let’s say “short”, and begins to move against you. You are disciplined, you’re strong, you’re patient and not only because his movement against you. You’re willing to give it time to work. OK, so it creeps up and leaves you out. Well, it is only a trade. Don’t feel bad about it, however, you still have the same trade idea and the feeling that the stoploss positioning was incorrect. So re-enter the trade! Then… it stopped AGAIN… That “rinse and repeat” a couple of times with the same result. This is the experience called “death by a thousand cuts”. It is not that you’re fighting the market, its price is still within the “sell zone”, however, has maintained their stops too tight! You don’t let your trades breathe.
So now that we’ve identified the problem, lets find the cause then find a solution. In most cases, the cause of this is that we make our risk management based on our threshold of pain. What does that mean? It means that we must place our stoploss at a level that, if price gets there, we will leave because we cannot take more pain rather than being a technical level which would invalidate our trade idea. Read that again, place your stoploss at a technical level that will invalidate your trade idea, but, naively, risk management, to what your threshold of pain. The market does not care about your pain signal.
So what is the solution? Take the following approach to your trading:
- You must first decide the level where it would invalidate their reason for being in a trade if the price never came there. They were plain and simple wrong. Count the number of pips between your entry and this level.
- Then how is that a great part of your funds you are willing to risk on this idea.
- Divide the risk capital by the number of pips and you’ll get the risk per pip.
Therefore, two to the conclusion, don’t base your money management on your threshold of pain, the basis of clearly defined technical levels, which will invalidate your trade idea.
Keep the pips flowing in!