Thursday, March 26, 2009

My Respectful Disagreement About Your P/L

Andy Swan is a trader, a friend, and a funny guy.  

He's proven himself in the market and in business as one of the sharpest tools in the toolbox.

And I respectfully disagree with him on this point he made today:
"The best way to take emotion out of trading is to stop caring if you lose and STOP WATCHING your P/L numbers." Source: "Emotion in trading must be killed"
This sentiment may have had its genesis in the following thread:
@ToddStottlemyre @IRON100 Interesting conversation. I trade w/stops of course but watch a real-time P&L -allows me to trade 8-10 positions
Here's my view on the importance of the P/L in trading:

By no means am I saying cut your trade if you are down a penny.  That said, nothing tells you more clearly how you are doing than your P/L.  Unlike your emotions which say to you, " . . .  just hang in there buddy", your P/L is constantly spitting out the truth:

I am winning . . . or I am losing.  Period.

P/L is at the core of money and risk management and without knowing what is going on in real-time you are on a path to failure.  

Granted there's more than just looking at it and stopping trades if you dip into the red.
You not only need to know your P/L you need to understand it with answers to these questions:
How much can I risk losing per trade?
How does each trade affect the total risk of what I am willing to lose per day?
Know these answers, understand the odds of the pattern to be traded in the market, and you're ready for anything the market throws at you.  Maybe there's no disagreement afterall - we both wind up at the same conclusion from 2 different paths: No emotion, no surprises - all reaction.


Eyal said...

Nice post. Definitely one way to look at it, although I'm with Andy on this. The answers to many of the valid questions you raise is in your position sizing and overall risk management built into your trading plan (number of trades per day etc.). When in a trade, IMO, it's best, especially for less experienced folks to just trade the chart and your rules rather than watch the P&L.

D TradeIdeas said...

I hear you loud and clear. Thanks for sharing your thoughts. It's a good academic debate to engage in, however, the beauty of trading: to each his/her own!

Andy Swan said...

I'm more concerned with the emotions that P/L numbers generate in traders. Turn that off and help turn off emotion.

Agree that P/L is the truth, but so is what I a general rule.