stocks, for example, if you do not use stops and hang on to losing trades to
a point where you emotionally feel you cannot exit the trade because the
loss is so large, you are doomed.
If this happens, you are “married” to that stock and it may not be a
stock you really want to own as an investment. Some stocks we trade are
good for short-term trades only because we are taking advantage of the
momentum in the stock. It may be a stock we would never invest in and
hold for a long time.
If you find yourself wishing for a stock to turn around, you’re not trading
well. Based on the reasons you entered the trade and the location of
your stop, you should always know in a second whether you should be in
or out of a trade.
WHAT HAPPENS WHEN YOU DON’T HAVE A
STOP-LOSS EXIT STRATEGY?
Never trade without knowing exactly where you will get out if the trade
goes against you. All large losses start as small, manageable losses. Let
me share with you an e-mail I received from a trader visiting the Traders
Coach.com web site. It illustrates the importance of using stops:
Dear Bennett,
I received your e-mail and I think your techniques along with your
software are fantastic. Unfortunately for me I am stuck in a bad
trade where I was caught without a stop/loss in the March “BP” several
weeks ago. I have lost so badly that I think I may have to fold
up my trading tent and seek a job! I have been waiting for a reversal
but I do not think one will materialize by expiration. I see a potential
triple top forming but I do not know how long the funds will press the
upside. I am looking for scalp trades in other markets with the little
margin I have left so as to try and recoup something by expiration.
If I am fortunate enough to survive, I will try to not make the same
mistake again.
I often receive calls from traders who either did not set a stop-loss or
failed to get out of their trade when their stop was hit. They tell me that
now they cannot get out because their loss would be too large to bear. If
this is happening to you, then you do not yet have the trader’s mind-set.
You have to realize that being stopped out is a natural part of trading. You
must accept this and not let it get you angry or upset.
Remember, it is better to cut your losses short. It is the only way you
will be in a position to let your winners ride.
SETTING MENTAL STOPS
For some markets it is better not to put the stop actually in the market
when you have the position on. Some market makers will see your stop,
and if there are enough other traders with similar stops, the market makers
may try and hit your stop. Then they make money and you do not. In
markets like this, you can set a mental stop and get out immediately if it is
hit. Be sure you have the psychological toughness to get out when you are
supposed to. If you don’t, then go ahead and enter the stop when you take
the trade.
MOVING STOPS
Never move your stop for emotional reasons, especially when it is your
initial stop. As new trailing stops are determined to lock in profit, you can
move your stops based on newly confirmed Pyramid Trading Points and/or
ART Reversals. If you add on to your winning trade (increase your trade
size), your stop must be adjusted to control your risk in relation to your
new trade size.
When adjusting your stop due to an increase in trade size, always adjust
the stop closer to your current position to lower the risk in relation to your
larger trade size. Once you do this, you should never roll back your stop,
since now your larger trade size will warrant the tighter stop to maintain
proper risk control.
Many students ask about moving stops based on different time frames.
This is an advanced technique. As a general rule, always set your stops on
the same time frame as you entered the trade. In other words, if you use a
daily chart to base your trade entry, use the daily chart to set your initial stop.
There are exceptions to this, but only after you have developed enough
experience. Become profitable using the same time frame first, then perhaps
venture into multiple time frames later.
With the ART system, stops are set based on the realities of the market
and should only be moved when the ART software designates new stoploss exits.
Read More: Trading Without Stop
