"So, how DO you keep your trades on a leash?"Excellent question. Here's what I do, and by no means should you take it as gospel. It's a weird little system that I've worked out over several years of trial and error. (By the way, if anyone out there has any suggestions for improving this method, I'd love to hear them.) Here goes:
- Before entering any position I determine how much money I'm going to allocate. Because of the relatively low margin, compared to a futures contract's true value, I always try to overshoot the margin requirement by a substantial amount. My target is to allocate at least enough money so that I'm operating at an effective leverage of 75% or less. The volatility of the market, in my opinion, makes being as leveraged as possible horrendously risky.
- Immediately upon entering a new position, I determine my maximum loss. For me, my personal rule, is 20%. That is to say, I refuse to lose more than 20% on any given trade. I do some math and determine at what price I'll have lost 20% of my allocated funds, and set that as a stop with my broker (a buy stop if I'm short, a sell stop if I'm long). As a personal rule, I will NEVER move this stop away from my position (that is to say a 20% loss is truly my personal maximum).
- I also determine what my exit point is; the price I want to exit this contract assuming it moves in my favor. I then set this as a limit order with my broker. (NB: I should say here that one of the best pieces of investment advice I ever received has caused me to be far more modest with my exit points than many traders would likely expect.*)
- Throughout the day, I alter my stop order if the price has moved in my favor.
- Unless I have new research to strongly suggest otherwise, I do not alter my limit price whatsoever.