The “Bright Line” Stoploss
Or, how to manage trades so that we can be in the game 17 June 2015
The worst nightmare for any trader is that his losses become bigger than he can handle. How did they ever get to that level? Because you allowed it to be so. But you saw it bloom, day by day, telling yourself that it will soon recede, it will become lesser, it will go away etc.etc. But it doesn’t. Instead, it becomes bigger, slowly at first, lulling into you some sense of complacency that it will all go away ‘shortly’. Then it begins to balloon, and you are hoping that if it just goes back to being a little less then maybe you will take that loss and be done with it. Instead, it blasts into a gigantic bubble as the market gaps against you or runs away from you. The pain now is too much. Not being able to stand it anymore, you give in and cut the position. Take the worst hit in recent times. Chastise yourself for being a fool, an idiot and a lot more other unpleasant things.
This is the story that every trader has gone thru at least once in his life. Be guaranteed that it is not the last time. If you don’t do something about it, for sure, it is going to repeat. Perhaps with even more devastating effect! What can be done? I was reading something about changing our habits and came across the Bright Line method. I thought it appropriate to apply to trading. Here it is. A ‘bright line ‘is our limit line. It is a point where we say to ourselves and others that we won’t do it anymore. Its like saying that I will stop at two drinks at a party. Like saying I will remain a vegetarian. Or some such. What will it do for us? First, it will convert statements in our mind to positive (from negative thoughts). When you draw a bright line limit, you are saying that you will not make an exception. This is the key. If we tell ourselves that “this” time I need not do it, we are lost. So by creating a limit for a ‘no exception’ state we create some positive reinforcements in our mind. Second, it makes decision making simpler at a time when it is most difficult. When we are facing losses in the market, deciding to cut the position seems the worst thing to do. The Bright Line strategy will make that decision in advance and since it is a No Exception rule, the decision actually gets made in advance! This will leave your mental faculties available for spotting other opportunities that may help redeem the situation!
This is how you can do it in your trading account. You have a position open. Think of the largest amount of money that you can lose (say 50k for eg) that will not upset you to the level that you wont be able to take another trade. Then draw the line at that price level. If it gets triggered, tell yourself that it is all right because it allows you to be around for another round. You can make it all back only if you are around to play. If you are out of the game, the loss is so much greater! Many times this will never happen. But the few times that it does, the loss will still remain at a level where you are not put out too much. Of course it is going to hurt. But that’s part of the game. Now you have decided not to fall a victim to the machinations of your own mind because you have already made the all- important decision to exit in advance. And that enables you to do it.
Just having the bright line there, knowing that you will not be carried out in a stretcher is encouraging enough to be able to see more of the market, observe greater number of opportunities to get back in the game, do more things with your volition is a great boost to your trading approach.