Stops and Exits

The more I trade the more I find myself obsessed with stops and exits, it is an endless guesswork of what makes a better exit strategy, particularily for trailing once your initial stop is safe. One of the most annoying things as mentioned in an earlier post is to see a position reverese immediately after your stop was hit. But then instead of just getting upset about it the real value is in figuring out that if this is a repeated pattern then something is wrong with the stop strategy.

Here are some good points about stops mentality. (If you’re expecting a magic stop rule then re-read this post a few more times ;) )

May 2003 Trading Tips Newsletter
Stops and Exits
by Judy MacKeigan

Let me start out by saying that there are almost as many ways of using stops as there are trading methods. In my opinion it is the most personal part of your trading system. Each trader needs to determine which method they want to use for stops and still be within their own comfort zone. If you are outside your comfort zone, then emotions are in position to take over and you will lose the focus you need to manage the trade correctly.

You should never enter a trade without having a predetermined place at which you will cut your losses. Yes, you will get stopped out only to watch price take off like you thought it would, but that is part of the game we are playing. If fact, if you do not have the right mindset for taking a loss, it will hinder you from becoming a good trader. Getting upset over it only takes away from you ability to focus on what the market is telling you.

Many traders also feel that getting stopped out is a loss. It really isn’t. In fact, you have won. By being stopped out, you have won most of your money back. Preservation of capital is so important to be able to continue to play this game. You also have the ability to reenter if price does eventually go the way you thought it would. Lastly, you have eliminated the frustration of not being disciplined by getting out when your predefined stop hit. One of the signs of a successful trader is having small losses and not huge ones. Think of that the next time you do not exit immediately and without hesitation when your stop is hit. Losing properly requires skill, discipline and maturity as a trader. Some say a stop is like insurance. A trade without a stop is a gamble.

Other possibly related posts:

• links for 2008-01-28
• DehTrader.com Live
• 39 pounds