Monthly Archives: June 2011

Eran Barak

VP Strategy @EranBarak

Prior to joining Sentigo, Eran served as the Global Head of Community Strategy for Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, where he led financial markets community and B2B social media initiatives. His career in the financial service, telecom and Internet services spans 20 years encompassing strategy, marketing and product leadership. Before joining Reuters, Eran held various VP and director positions at innovative startups and companies in the Telecom industry.

Eran earned B.Sc. in Computer Science from Tel-Aviv University in Israel and holds an Executive MBA from Kellogg School of Management at Northwestern University (Evanston, IL).

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“One of the great tools of trading is the stop, the point at which you divorce yourself from your emotions and ego and admit that you’re wrong. Most people have a tough time doing this, and instead of selling out a losing position, they’ll hang on hoping that the market will realize the error of its ways and behave as they believe it should.” – Martin Schwartz

Stop losses prevent you from more than just blowing out your account. They also prevent you from serious potential emotional harm.

A stop loss is typically an order where you exit an open position in order to limit further capital losses. These can be hard (fixed order) or soft (mental stop). Often traders will have difficulty accepting that they are wrong and thus hard stops are preferred. Accepting you are wrong is one of the hardest things a trader has to do on a regular basis.

But it was just upgraded.

Maybe it’ll bounce.

It’s just a fake out. They’re not going to get me.

It can’t possibly go any lower.

I’ve got to be right this time.

But… we’re at major support…

The rationalizations go on. All the while, the market doesn’t stop moving.

In addition to protecting the dollars in your account, stop losses also prevent you from suffering a serious emotional set back.

Most people have heard of the Kübler-Ross Model. These are the 5 stages of grief that are typically applied to severe loss. For most people that is typically the loss of a loved one. Now I’m not saying that money compares to human life in any way, but if you put yourself in that position, it sure can feel that way.

Let’s say that your trading account represents your life savings. Imagine failing to obey or place a stop loss. Imagine losing 50% of your account or more. That’d be a pretty devastating event.

Applying the 5 stages of grief to a similar situation:

• Denial – I lost how much? This must be a nightmare. How could this be possible? The market never moves that far or that much. They were supposed to beat earnings!
• Anger – How could I have been so stupid? Why didn’t I place a stop loss? You want to take my money (talking to the market)? How’s this… (revenge trading)
• Bargaining – If I make it back, I swear I’ll never do it again. Maybe I can call my broker up and they can do something. Let me just make it back to break even.
• Depression – I’m a loser. I might as well give up trading. I knew I would fail, it was only a matter of time.
• Acceptance – I should have stopped out. I should have read the signals better. It’s ok, I can pull myself out of this, I can make it back.

Some comments on the above stages: They don’t have to occur in order. Not everyone has to experience each step. These feelings can last for months or longer.

In addition to having dug themselves a huge hole, how do you suppose a trader in this position is going to perform? I’d have to guess they wouldn’t be doing very well. They’re going to be preoccupied with the prior trade.

Can you imagine going to work the next day after suffering a personal loss? How about the day after that? A deep personal loss would affect you for quite some time.

Part 2 should be out tomorrow.