Stop Loss Should be Part of Every Day Trade Management
Let’s face it – the financial markets are difficult to predict. There are so many market forces that impact the direction of a position that it’s impossible to trade successfully 100% of the time. That means losses are bound to happen. If the Warren Buffett’s of the world can pick losing trades, so can the rest of us. Being able accept losses is an important part of a successful trading career. Some would say setting up a trade with a stop loss, infers “I am willing to make a loss at this level”. At a price level that is beyond trade setup parameters.
Many traders have their own personal strategy for managing their trades. The theme that is critical to these differing stock trading strategies is discipline. A Stock trader’s hardest task whilst managing his open trades is being disciplined. The Stop Loss is part of many successful trader’s trade management strategy. The discipline of leaving this on can be the hardest to master, especially when a trade is going against them.
Stop Loss and Trading Psychology
The importance of a stop loss order extends far beyond the actual tool itself. The stop loss allows traders to establish important, self-governing trading rules. Therefore, these rules can help them limit exposure to downside risk in the market. In this way, the stop loss order can be an important tool for helping traders manage the psychological aspect of the financial markets.
Trading psychology refers to all aspects of a trader’s mental composition that can help determine whether they will be successful in the markets. This aspect of behavioural finance has taken on a whole new level of importance in the 21stcentury. Millions of retail traders are accessing the markets over the internet. Many of these traders have no formal training in the financial markets and most are trading their own money. For these retail traders, trading psychology may mean the ability to remain disciplined, control fear and preserve trading capital at all times. Therefore, critical for success.
It’s easy to see how making use of stop loss orders may help market participants manage their trading psychology. Through stop-loss orders, traders may eliminate the fear of the unknown and manage unwanted risks on any given position. More importantly, a simple stop loss setup may help traders control fear and anxiety when placing an order. This ability to stay level-headed in the face of pressure is necessary if one desires to have long-term success in the market.
When Traders say I don’t believe in stop loss
What traders actually mean is I don’t like to admit I am wrong. They are often acutely aware that there is something wrong. Yet, they are willing to take on more pain and more uncertainty by moving or removing a stop loss. Therefore, hoping that things will turn around and that they will be justified in their trade management decision. At the heart of this lies a confusion between outcome of making/losing money. If being profitable equals being right, then logically losing money means being wrong.
Any loss is therefore a direct attack on the self-image constructed by the ego. Since the ego wants to be right, and will always protect itself at any cost, we will sacrifice profits. Even endure agonising pain for long stretches of time holding on to trades. The objective is no longer to be profitable but to validate the ego.
Enter a Trade – Be Prepared to Lose
Really? Should we enter every trade prepared to lose money? That goes against our ultimate goal for trading and that’s making money! Let me explain this a little clearer.
As traders we must have the strength and conviction that our analysis is correct at the time we set up the trade. BUT, we must also have the forethought that market conditions may change. Even unexpected news coming out on a stock or sector is a possibility. These possibilities should not scare us into indecision, otherwise we would never put on a trade. Instead we should have an acceptable level in mind if things don’t go the way we expected. So as part of our initial analysis on a particular stock, our stop loss position should be part of that process. So a trader must be prepared to make that loss if the price goes though the stop loss level he/she has set.
The same conviction in the analysis must hold true for the stop loss position and therefore should be “set in stone”. Therefore, traders can eliminate the fear of the unknown and manage unwanted risks on any given position by maintaining a strict analysis process.
Keeping it Simple and Repeatable
My Core Trading Strategy has a step by step, simple and repeatable process that i use when I make my analysis. One of the first steps in my “Entry Strategy” is to identify my Stop Loss position. I developed our Elliott Wave Indicator Suite, to help traders follow these simple and repeatable processes. I even cover the Entry Strategy and Stop loss placement in the accompanying Training Bootcamp as they are a key foundation of my trading strategy.
The Short Video below shows two simple trade setups with Stop Loss placed, which is part of my routine for every trade setup. The only way to move these stops is by moving them to protect profits!