or 1 dollar, or whatever) than with you by three units (percent, dollars, etc.). Call
me a bad systems developer, but I believe there is no way around this sad fact.
To be fair to the group that first mentioned taking a profit as the most com-
mon exit reason, it didn’t take them long to change their opinion after they rea-
soned about it among themselves for a while. It’s still scary, though. Taking a prof-
it still was the first thing that came into their minds when asked, and taking a prof-
it probably also is the first thing that comes into their minds when entering a trade
in real life. Conditioning yourself to believe most trades will be profitable simply
can’t be the best way to prepare yourself to take that inevitable loss that will hap-
pen more often than you care to think about. (I know, this contradicts what I’ve
said previously: Why enter into a trade in the first place if you don’t think it will
be a winner? But such is your life as a trader, full of contradictions and “sure
things” that don’t turn out as they should.)
I also believe that not being prepared to take the loss right away makes us
take the loss for the wrong reason once we do take it. How many of us haven’t,
for example, done a trade like this: You enter the market believing this trade will
be a sure winner, only to find it moving against you right off the bat. After a
while, it also has passed through the level where you originally had decided to
take a loss, but because you were so conditioned to think this trade was going to
be a winner, you just can’t make yourself take the loss. Not until you have an open
loss twice the size that you were originally prepared to accept does the market
turn around and start trading your way. But before the trade starts to show a prof-
it, the market stalls and trades sideways. After having watched the market move
sideways for quite some time, frustrated, you finally decide to get out of the trade
with a small loss.
What happened here? In the end, you did manage to end up with a smaller
loss than originally accepted, but was it worth it? For one thing, do you know how
many trading opportunities in this or other markets you missed because you had
your money and your attention focused on this trade? Probably not. Perhaps you
would have been better off taking the loss right away, so that you could have
entered this or another market a second time a little later. In that case, the frus-
trating sideways move might have come in a situation where you actually had a
small profit. Then you would have been in a much better position to just wait it
out, which you couldn’t do this time. And last but not least, didn’t you end up exit-
ing a trade with a loss, even though it, in essence, finally went your way? There
was a sideways move going on, but hadn’t the trend reversed earlier? Yes, it had,
and I believe that taking a loss in this way is probably the most common exit there
is. It’s good to take a loss, but not for all the wrong reasons.
Consequently, the best and most efficient way to end a losing trade is with
a stop loss that preferably should be in place the second after you’ve entered
the market. This is also necessary for money management purposes, which we
will talk more about in the next chapter. Here, I only state that, if you have a well-202 PART 3 Stops, Filters, and Exits