Note: This article shows why the use of stop loss
is 100% mandatory, despite what suicide traders (who call themselves
professionals may say). This article comes from someone with over 60 years of
experience in various financial markets.
Would you ever think of jumping out of an airplane without a
parachute? Of course not, but that's what some people do when they trade the
markets. They are very willing to put their money on the line, but they don't
have much to protect them from a major disaster. Placing a stop, for example,
can prevent you from allowing a small loss to turn into a big one, but many
traders avoid placing stops. Why do some traders take risks by not placing
stops? It can be difficult to know where to place a stop. If you fail to
account for volatility, you will get stopped out too soon. Other people are
afraid to place stops. Placing a stop requires you to consider the worst-case
scenario, and to many, it's difficult to consider failure. It's easier to deny
the potential problem, and to pretend it will not possibly happen. Many
experts, however, suggest placing stops. They know that nothing is certain when
trading the markets. They view protective stops as a kind of insurance policy
that prevents a catastrophic loss.
One seasoned trader I talked to, says "I never take a
trade without knowing my stop. When I take a trade, I'm pretty convinced it's
something worthwhile. I've already figured out my stop. I've accepted the
(potential) loss before I ever clicked the button or made the call. So if it
starts going against me, I don't feel a flood of emotions." For that
trader, stops not only protect him from losses, but they help him control his
emotions. Stops give him a feeling of security, and allow him to feel calm and
relaxed.
Experienced traders may use stops all the time, but even the
most experienced traders have difficulty following them. For example, one
trader I know, admits, "I've blown stops and it's painful. The weird thing
is that money does not seem to be driving it. Afterwards, I sit and try to
analyze the incident. I certainly knew better. I believe trading is something
of a self-journey. It involves learning about your character, your
self-control, and your ego."
Still another trader also admits he blows his stops:
"Sure. That happens all the time. There's nothing I can do about it.
That's one of challenges that continue to engross me. Do you hold them or do
you fold them? If you fold a long position and prices go up, you get angry
because you made a mistake. If you hold a long position and prices go down, you
become angry again. Nevertheless, you have to stay focused on what's going on
and learn from the experience and try to apply it to the future. You're going
to take your lumps in the market."
Even though stops are difficult to set and difficult to keep
at times, they are an essential component of risk management. Losses are
commonplace in trading. As hard as it is to focus on losses, they are
impossible to avoid. Rather than avoid thinking of the worst-case scenario,
face it head on. Figure out what could go wrong and where you can place a stop
to protect you from a huge financial loss. In the long run, you'll find you
will limit losses and trade more profitably.
Author: Joe Ross
Source: TradingEducators.com
The note below ends this piece.
“So, what is a trader to do? Well, one of the things to do is to
re-evaluate the way you envision the markets and your relationship to
loss. What you want to develop is an I
don’t care attitude regarding your trading.
You must look at the markets as being exactly what they are, totally
unpredictable. No matter how good a
level looks, it is not a foregone conclusion that any particular outcome is
definite. What we look for is the high
probability trade. There are times when the probability may get very close to
100%, but no matter how close it gets it can never be 100%. This means that whenever you enter a trade
you must embrace it as a possibility for loss. When you do this, it detaches
you from the loss potential because you are prepared for it.
Of course, you already have begun this process whether
you realize it or not. You have put in a
hard stop! This is imperative. The stop’s first and main job is to protect your
capital. If your capital is gone you
cannot trade, so it follows that this is the most important part of your
trading; and, of course it is derived from an appropriate risk calculation.”
– Dr. Woody Johnson (Source: TradingAcademy.com)
