Bollinger Bands Message Board

[swimmer1200@gmail.com]

This is probably more of a trading psychology issue—

When the market moves against a new position, how do you reconcile selling back out to cut losses short when the reasons for entering are still intact?

I’ve been caught a few times opening a new position and hanging onto losses a little too long. How did you all overcome the problem when you started? If I am going to correct this, what should I be thinking about?

Thanks!

[bbands]

This may seem simplistic, but I think that it is really the grist of the matter: What are you willing to risk in order to capture the anticipated reward? If you decisions are systematic, this is somewhat easy to calculate and adjust. If you decisions are more intuitive, it may be quite a bit harder to get a handle on. Say you have a stock trading at 40, you think it will go to 80 and you are willing to take 10 points of risk, so the risk/reward is 10 versus 40 or 1 to 4. Typically a payout ratio like that will be profitable over time, unless the entry decision process is very poor. (There is also the very real possibility of a storing of losses that forces one to stop trading.) The bottom line is that you have to get some handle on the risk reward relationships that result from your decisions. After that, the adjustments will come naturally.

I am not entirely sure that I have addressed you concerns, but I hope that helps,

jab

[bbands]

Here is a bit more for you think about. There are really only two ways to improve your trading performance. You can improve the number of winning trades versus the number of losing trades, or you can improve the size of the winners versus the size of the losers. Ideally you could do both… Some traders are homerun hitters who have relatively few winners, but whose winners are much bigger than their losers. Other traders are production hitters who have more winners than losers, but for whose winners are not as relatively large. Each discipline has its pluses and minus. Who wants to have to endure a lot of small losses? Who doesn’t pine for a really big win? While it is up to you to decide what is works for you, just surveying the territory has its benefits.

jab

[swimmer1200@gmail.com]

Thank you very much for your thoughtful response—I really appreciate these points.

To help clarify, here’s a scenario:

Say I enter a trade using Bollinger Bands and MFI as discussed in your book. The stock selected to trade is determined by some fundamental analysis and its current price relative to to a valuation I determine. I have a thesis and a thought about which direction I want to trade but after entry, the stock moves against me. No signal has been triggered yet to exit but I am loosing money and toward breaking that risk/reward ratio you mentioned. I don’t necessarily want to sell since I still have confidence in my thesis and that things will turn around and the trade will work out.

Of course I realize that there may not be a perfect response to these types of situations; you’ve probably lived through a few of them yourself. At what point do you say enough is enough, the trade has moved against me enough, and I am exiting? Exiting at a loss when you still have confidence in your thesis is psychologically very troubling! What advice would you give? Cutting losses short is paramount but what is your typical thought process to concede to a market moving against your position by selling?

I hope that helps make my question a bit more clear-- Thanks again!

[bbands]

The problem you are discussing arises from the interaction of two independent systems. On one hand you have a Bollinger Bands trading approach and on the other you have a fundamental screening process. An MFI signal of the type you describe is usually considered void if a new low is made, so you are left with your fundamental opinion and little idea of how to mange the trade.

The way I have done this is to use the fundamental data to develop candidate lists and then trade the candidate lists in line with the fundamental view. For example if the fundamental screen is bullish, I’d take only buys. So, the fundamental info sets the universe and the technical info governs the trade.

I hope that helps,

jab