The 90/90/90 rule is a basic rule of trading. It means 90% of new traders lose 90% in 90 days, generally. Can a trader avoid become a part of this statistic? Of course! By creating a trading strategy, testing it via virtual trading, researching ticker and option targets, and trading with a loss minimizing mindset a trader can avoid the common pitfall for new traders.
I’ve included a loss and gains table to place losses into perspective.
A trader can see that at between 10–20% loss it would take a little bit more gains to recover. If 90% was seen, like what occurred with $GTATQ over a year ago in A DAY, then a 900% pps increase would be required to get that 90% back.
Setting a stop loss, employing a hedge, and/or diversification are what I mean by limiting losses.
A stop loss is a specific trade type that a trader can set for a certain time period. It allows a sell to occur at a set amount so the trader can limit losses. A trader can also set pps alerts to manually sell thus having a manual stop loss in a trading platform, software or app.
Underlying options of stocks can be another method for limiting trading losses. Options can act as a hedge against stock value going the opposite direction of expectations. Let’s say 1,000 shares of $AAPL are owned at $90/share. $AAPL has moved up well to $110. Ooo no, news is being dominated by $AAPL’s iPhone sale saturation and short-term doubt is beginning to appear. The trader of $AAPL can buy Put options or sell Call options as an option writer to hedge a stock position in the short-term. A Put option gains in value as the underlying stock value goes down. A Call writer gets to keep the premium of Calls sold as the underlying stock value goes down.
Diversification is the last topic for limiting losses in this discussion, and can be studied for years to get down as an art. Diversification is simply not putting all the eggs in one basket of gaining opportunity. Placing all of one’s account into one trading vehicle is fool hearty. There are thousands of different trading vehicles and using a certain percentage allocation of account value into many will limit losses.
Here are some sample diversified portfolio trading vehicle statistics from Brown & Tedstrom:
My focus of trading has been stocks less than $10 and options. A trader trading an OTC penny stock needs to be mindful that market makers (MM) on the OTC like to bring a ticker’s pps down to popular stop loss points such as 20–30% to trigger the selling of shares. This allows the MMs to buy at a lower point should they think a catalyst will make the pps jump in the future. This type of MM behavior isn’t prevalent in the NYSE and NASDAQ where options are traded.
Cut your losses short and let your winners run.
Limiting losses is just as key as getting consistent gains. The main goal is to have a net profit to allow a trader’s account value to grow for future goal achievement.
