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More important than this is the process by which you decide when to implement
the failsafe mechanism.
The process by which you define your plan will depend on your risk tolerance.
The idea is that certain markets will only move a certain amount in a given time
period. If you are scalping for a few ticks then your time period is nonexistent,
you must execute your failsafe immediately. If you time period is daily or
weekly then you have more time to react.
I generally immediately close out unwanted positions that may have been
entered in error regardless of PnL. I want to be in control of my account and will
not allow a random trade to fit into my trading plan.
The failsafe rules should follow a simple If Then syntax.
For example:
If {emergency event takes place}
Then {flatten all positions}
Having objective rules and systems for your trading will keep you logical in
your activities at all times. When you become an order enterer - entering orders
as described by the trading system you eliminate subjectivity and emotional
influences from your decision making ability.
Your plan should be a living breathing document, when you find something that
repeats and should be corrected, update your plan to represent this discovery and
implement it accordingly. Be sure to wait until after the end of the trading day to
recreate the plan. You will then execute the new plan the next day, never deviate
from the plan during the trading day! If you believe you have discovered a flaw
in your system, or you begin to ignore your rules stop trading for the day!
Research, reflect and confirm your ideas before getting back to the charts the
next day. Leaving this much time between your plan modifications will ensure
you are not revenge trading; this is similar to a cool off period for purchasing
firearms.
Chapter 13