TPS E10: Why Stoploss is your friend?
THE USE OF STOP ORDERS
I think any trader, no matter how good their discipline is, should be using stop loss. In all my years, I’ve never met a successful trader who didn’t use stop loss. It will definitely help you act in your own best interest more often than not.
Whenever I initiate a position, I always make sure I have a stop order in to protect myself. I highly suggest all traders also use stop orders to protect themselves and their open positions. I can’t tell you how many times I’ve spoken to traders who’ve failed to use a stop order and then lost 20-25% of their account in a single trade.
The more you trade, the more you realize what a big part emotional discipline plays in your trading. Like I’ve said before, being successful really has more to do with acting in your own best interest than it does the technical method or system you’re using, which is precisely the reason using stop orders will be so important to your trading.
It really surprises me when I hear people say, “I hate using stop loss!” Stop loss are the trader’s best friend. As we talked about earlier, protecting yourself and acting in your own best interest is the only way to be profitable. Using stop orders to protect your trades allows you to be a little less emotionally involved in your trades. And, as we know, the more you let your emotions get the best of you, the less likely you are to make money.
Some people don’t want to use stop loss when trading. For some strange reason, they get caught up in thinking that the market will hit their stop loss and then immediately start moving in their direction after they’re stopped out. And you know what? This will happen sometimes.
For people who attempt to use mental stops (where they’ll just have SL in mind instead of putting the stop loss in the terminal), the problem comes up when the market does go through their mental stop order, then reverses and starts moving back in their direction. Usually, these people are at a loss of what to do next. And the unfortunate thing is it usually costs them a lot of money, as they do not act in their best interest. They let a losing trade turn into a huge losing trade.
The biggest reason people don’t want to use stop loss is because they can’t or won’t admit they were wrong about which way they thought the market was going. This is about the worst trait you can have. There is nothing wrong with having a manageable losing trade. The difficulty comes in when your losing trades are unmanageable. This can easily happen because you take too much risk on a particular trade by not using a protective stop loss.
I think these people are under the impression if they don’t get out of the market (by not using a stop loss), they can’t take a loss because the market can always come back. That idea is attractive to some because it can actually happen like that. The market can come back, no matter how far it was once against you. But I’m telling you, you are asking for a disastrous situation. If you want to act in your own best interest, you will not let yourself get into a situation like that in the first place.
It happens all the time. I talk to people who only planned on risking 2000 rupees on an trade. They didn’t use a stop loss, and because they didn’t have their best interest in mind, they have a trade that is 6000-8000 rupees against them, and they’re hoping and praying the market comes back. Hoping and praying is not acting in your own best interest. I guarantee you that!
About the only way I know to be a successful trader is to have your stop loss in place and let the broker get you out of the market if you’re wrong. Again, small manageable losing trades are fine. They are part of every successful traders day. If you think you can avoid them, you’re wrong. And if you think you can avoid them by not using stop loss, in my opinion, you should just save your money and not even trade. That is just my opinion, but I’ve been around for a while and I’ve seen a lot of traders try to trade without stops.
Trailing Stop Orders
Another way you should be acting in your own best interest is to trail your stop orders to lock in profits in your trades. There are thousands of different ways in which to trail your stop orders as the market moves in your direction, but we won’t get into all those here. The main thing I’d like you to understand is why it’s so important to trail your stop orders.
When you get some decent profit in your trades, you’ll want to trail your stop order, first to break-even, and then to hopefully lock in some profit in the trade. This is a very important thing to do. Without doing this consistently (no matter what timeframe you’re trading), you will not be successful.
As soon as I get decent profit in a trade, I want to move my stop to break-even. In other words, if I’ve got a thousand rupees profit in a trade, I’ll move my stop to the sameprice where I got in the market. Thus, if the market starts to come back and take away my profits, about the worst that will happen is I’ll scratch the trade, or only lose a few ticks. But, if I hadn’t moved my stop to break-even, then not only would the market have taken away the small profit I had, but I could also end up with a loss in the trade.
One of the hardest things to deal with (emotionally) in trading is when you’ve had a decent profit in a trade and then end up losing money on that trade. This can be very frustrating for a trader. It causes you to make dumb decisions because it is emotionally draining. This is why I think it’s so important to avoid (as much as possible) getting yourself in these situations in the first place. If you can consistently trail your stops to break-even once you get some decent profit in them, you will be a lot better off. You will avoid turning winning trades into losing trades (which is the biggest reason traders fail to be successful).
Whenever I tell people about how important it is to move their stop to break-even, I always get some people telling me that if they left their stop alone, they wouldn’t have gotten stopped out and the market would have gone their way. Basically, they are saying that by moving their stop to break-even, they got stopped out. But if they had left their stop in the original place, they wouldn’t have gotten stopped out and the market would have gone their way.
Do you know what I say to that? So What!!! That will happen sometimes. But many more times you will end up scratching the trade instead of taking a loss. And that is how you protect yourself. In this business, protecting yourself and acting in your own best interest is so much more important than taking a chance. It’s not even close. I can’t stress that enough.
I repeat,
“In this business, protecting yourself and acting in your own best interest is so much more important than taking a chance. It’s not even close. I can’t stress that enough.”
And remember, the same idea is true when the market continues to move in your direction. You’ll want to continue to trail your stop order as the market continues to move your way. Again, people are afraid of getting stopped out and then having the market continue to go in their direction. That will happen sometimes. But that is what having yourself protected is all about. You must concentrate much more energy on keeping yourself out of trouble (in other words, out of losing trades that were winning trades at one time). If you keep yourself out of the bad losing trades, the winning trades will come.