Posts Tagged ‘long position’

Hi all,

Many time you open you favourite spread betting platform choose the Index you like, click on  the chart and thinking: should I go long? should I go short? where the hell the market is going to?

well take a look at this chart of the Dow:

this is a chart between the mid October till now. This is after the big crash of beginning of October. Now lets say you want to enter to the market at 8500 and you don’t know if the market will go up or down. Lets check what has happened on both scenarios:

Short:

You were lucky on the first day, but the day after the market went up by almost 1000 points. That’s a lot. And I am sure that your stop loss cut your losses way before that. But wait a minute, before you use the stop loss, think again.

Since your trade the market has come back 28 times to 8500 until today! I will say it again, 28 times. In other words if you didn’t take your profit on the first day, and then by the second day the market run away from you, you had another 27 days to break even or to take some profits.

This is the same story if you went long. The first day you lost 200 points but the next day the market came back to you and you were up 1000. I’m sure that by this time you closed the position and invited your girl for a nice dinner. But if you didn’t you still had plenty of chances to take profit.

My point is that stop loss is important tool but can really cause you damage. In our chart if you went short and close your position on the second day you LOST. Or if you bought the Dow on the first day, and in one point the index went all the way down to 7900 you lost again. Heavily.

Patient is the name of the game. It is not easy and you need a deep breath, but it pays off.

Now take a look on the chart before Mid October

You can see that if you went long on the Dow at 10000 on the 6 of October you had only the following day to recover. But…
If you don’t remember the beginning of October were extraordinary, almost one time event. And there were a lot of bad news. In this case it crazy not to use stop loss. Or it is even crazy to go in and trade, because it is more like a casino. But even if you did, and on the first day you lost 500 points, you still had one day to recover and take profits!

I need to learn this lesson myself. We are human and we get stressed from losses. It is only natural. But before you open a position you need to set yourself a target. How much you aim to make. Once your reach that point, don’t close the position but asses the situation. If you think the market can go more stay. But don’t be greedy… because as the chart shows it will work against you.