What are 3 common mistakes people do with their SL placements?
What are 3 common mistakes people do with their SL placements?
Don’t Become An “INVOLUNTARY TRADER”
Let’s take a simple example: A trader would see an opportunity and take a quick “Scalping trade” for just few points. The moment the “trade” moves against them and starts to pick up a loss, all of a sudden they would consider changing this trade into an Intraday position. Some people make it even worse and would convert it into a positional trade. In this case, they become an “involuntary trader”. People hate to admit mistakes, so they rationalize their decisions this way. But this won’t do them any good, this will actually convert a small loss into a very very big loss.
Rules Are Meaningless Without Discipline
Lot of people will have stop loss in mind instead of placing it in the system. It’s no good having a “mental stop loss” by telling yourself, if the stock falls to this specific price, I will get out there. Because, stock might fall quickly from there and you end up holding your position with a bigger loss. Some people are even more worse, they will just have a mental stop loss, but they don’t follow it. That’s like driving without ever using the brakes or, only using them on occasion.
The problem with a mental stop is that it’s too easy to “forget” or “miss” the exit, and then you will end up holding onto a losing trade, telling yourself that you’ll sell once the stock recovers. Let me get back to breakeven and I’ll get out. But the stock may keep going lower, while the loss keeps getting bigger. For most traders, it becomes even harder to sell as a loss balloons. Every huge loss starts as a small one. The only way to protect a trade from turning into a large loss is to accept a small loss before it goes out of control.
The Emotional Stop-Loss
Everyone has an “emotional stop-loss” whether they like it or not. The point at which you can’t take it anymore is your emotional stop. For most traders, emotional stop is far beyond the point that makes mathematical sense.
This is their worst case scenario. They will blindly exit when their emotional stop loss is hit as the emotional pain they feel at that time is beyond their capacity. And in most cases, market will immediately reverse after they exit, which makes things even worse for them, doubling their emotional pain.
Generally emotional stop losses are large losses, which can do significant financial and psychological damage to your trading career. Allow enough trades to hit your emotional stop, and you will surely do damage to your confidence in addition to your capital, and as a result, you will be less likely to make sound trading decisions going forward.
If there is one thing that is unacceptable in trading, that would be “Large Losses”. Someone who cannot avoid large losses can never become a successful trader.
For more details and examples, checkout the video: