Setting and Using Stops


Risk Management
In trading, it is critically important to protect your account from large losses.  That is why we always  use a Stop Loss order on EVERY trade.  No Exceptions! 

What is a Stop Loss?
It is a predetermined price at which you will exit your trade at a loss.   In the course of trading the markets, it is rare to hit the exact bottom when buying a dip, so under normal circumstances, a trade may spend some amount of time in the red.  Occasionally, the system will identify a trade which keeps dropping with no end in sight. There is no way of knowing this in advance; no one knows the future.  

Effectively using Stop losses is one of the most difficult aspects of trading because it is psychologically easier to hope for a turnaround in your position than to take your losses.  

Misconceptions About Stop Losses
1. Myth:  "If my entry point is correct, I will never need to stop out of a position at a loss."  Wrong.  There is no such thing as a perfect entry point.  All trades are a matter of probabilities.   A system's win rate is dependent on the quality of the entries, exits and stop losses.  A high win rate generally means the system has wider stops.  (Although a high win rate is easier on the trader emotionally, it is not necessarily the most profitable or safest way to trade. 

2. Myth: "If I use really tight stops, I can't lose money."  Wrong.  Tight stops tend to get you out of a trade in the middle of the noise of the market.  This will trigger your stops very frequently almost guaranteeing a loss over time.

3. Myth:  "Getting stopped out makes me a loser".  Wrong.  If you have a well defined system with your stops set where they make sense, and have been proven to work in back testing, then getting stopped out means you are following the system.

Trading is primarily about risk management.  Set your stops wisely and honor your stops. Some brokerage software can do this for you using a "Bracket Order" feature.

Remember this slogan: "Stop out, Save Money"




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