| JAN 1991
Trading Simply: Minimizing Losses by John Sweeney
Trading Simply: Minimizing Losses by John Sweeney Richard Dennis is said to have said, ""There's a lot less to trading than meets the eye."" If so, he was correct. I like to describe an approach that has nothing to do with entry or exit, but everything to do with minimizing losses. I believe virtually any system that can identify successful trades can be profitable, given good loss control. Here's how. FUNDAMENTAL RULES Approach trading, particularly futures trading, as a zero-sum game. In such a game you can only win if someone else loses. Stock trading is not such a game, definitively, since its total value can rise and fall. However, I see no reason that rules sharpened in the harsher regime of futures wouldn't serve well in stocks. (Idea: what to make of instruments such as index futures, which are traded in zero-sum markets but derive from non zero-sum markets?) Thus, as a practical matter: Rule 1: The theoretical solution to a zero-sum game is to minimize the size of. your largest loss. Every trader has heard that adage before: Cut your losses. Rule 2: Trade a small percentage of capital for any one position, preferably 2% or less. I don't know a serious trader who commits more than 5% of his capital in any one position, and most are around 3% . I've had people ask me what their returns will be if they commit 10-15% of their capital to their positions! Their return would be a wipeout, because the probability of ruin is very high and very quick—say, three months. Now, to keep the loss in proper proportion to capital without being stopped out of positions, you need a technique for estimating the size of the losses you'll take. I'll show you how to estimate this precisely, but first, one more general rule:
by John Sweeney
Technical Analysis of STOCKS & COMMODITIES
The Traders’ Magazine since 1982
has had over 1,226,237 subscribers from 174 different countries.
37,000 Page Traders’ Archive for $89.99
To continue reading, sign-up for trial access to Traders.com and the S&C Archive — 37,000 pages of trading ideas!
After verifying your email address, you will have limited access to the S&C Archive, as well as access to a Digital Edition of S&C, and access to Traders.com Advantage and Working Money for 30 days.
Not a subscriber to Technical Analysis of
STOCKS & COMMODITIES magazine?
Click
here to subscribe, or request
a trial subscription.
Log-in now to view articles from the S&C Archive.
Your Subscriber ID is located at the top of your magazine label, highlighted here in red.
Your last name can be found on the second line, highlighted here in blue.
*If you have a company name on the label, that can also be used. It will appear below your name on the label.
If you do not have a Subscriber ID on your label, you can find it on your statement or renewal form.
For help locating your Subscriber ID number, please call us at 1-800-832-4642 or send an email to Survey@Traders.com. If sending an email, please include your name and mailing address.