Interesting chat on the mentor forum this weekend regarding open equity, that is the value of your positions measured to the current close versus valuing positions to the level of their stops.
This discussion was prompted by the following graphic I posted which looks at one of the advisory service portfolios. This portfolio trades a nominal $100,000 and I was looking at the various equity (profit) levels since last month when the system switched itself back on.
The system has two distinct approaches, one conservative and one aggressive. The chart above looks at various measures of equity and you can see a stark difference between measuring the level of your equity to the current close versus measuring it against your stop. The measurement of equity against a stop is the more valid measure since barring appalling slippage you will capture most of this. In the case of open market profit you will give most of this back before it hits your stop and this is where some traders run into problems.
When you have a CFD account you are marked to the current price – so if the market is running hard it seems like you have a lot of profit to spend. And people do – this is the problem, when markets retreat they are left exposed to these large drawdowns in open profit. This is followed by much sooking and accusations that CFD providers are the spawn of Satan and the downfall of society is imminent. In reality what has happened is what always happens to poor traders they make stupid decisions and then look for someone else to blame.
One of the major psychological hurdles that traders face is the need to overcome the belief that open profit does not belong to them – it belongs to the market. The only claim they have is to the value of their stops and even this can be a tenuous claim.
I will leave the final word to one of the mentorees Randall G who doctored the above chart to adequately display the emotional trauma traders face.