September 06, 2006 at 9:56 am | | Comments 9

Stop It!

Stop Loss

We all know what happens after the stop!

I used to think that the most successful traders just knew how to locate the big winning trades and that was the key to their profitability.

Not anymore – I’m past that, and thankful that I finally realized it. It took some time, probably because of the irony of it all. Who would have thought that the best traders’ real key to consistent profits in the market all boils down to humility and their ability to get out of trades when they need to the most? What happened to bravado and having the guts to take the plunge and go big when you really feel you’re right? Is that not how the best traders do it?

Occasionally that approach might give you a windfall profit, but what happens when you’re wrong (and you WILL be)? If you don’t have an exit plan, you’re gonna be toast. It’ll be Hammer Time for your account, and it won’t be pretty or fun!

If you don’t respect the market, it will force you to respect it.

I’m a huge advocate of using stop loss orders, regardless of your operating timeframe. There are plenty of reasons to sell your stock, but the most basic premise is that once your trade stops behaving as you expected, it’s time to consider kicking it out the door.

If your trade has a long-term timeframe and you’re looking for an extended run over the course of many weeks or months, your position size is likely smaller so that you can endure larger shakeouts and hang on for the bigger move. You might even want to set multiple stops for pieces of your trade so that you don’t get taken out all at once at the same level if the move against you proves to be a headfake. Whatever your requirements, just be sure that you have an exit plan in place in case that shakeout turns into a full-blown reversal.

Those trades which have worked for you and are showing you a profit might deserve a little room to run, but don’t be willing to surrender that entire profit because all of a sudden you’re married to the position. Raise your stops up to a point just beneath the recent market noise, because a move down through that level will probably mean your stock is about to undergo some corrective action. Unless your timeframe is such that you’re willing to endure those pullbacks, Take the Money and Run!

And last but not least are those trades which haven’t yet proven themselves. These are the trades that deserve the least amount of credit, and a hard stop should be in place at all times for the full amount if these trades start to misbehave. With commission costs so low, there’s simply no excuse for keeping a position once it begins to cost you money. Cut that thing quick, get it off your screen, and re-buy it later if you start to see signs of promise again. In the meantime, kick it to the curb and look for a better opportunity (even if that means going to cash).

Achieving greatness in trading begins with humility. Stubborn pride doesn’t accept losses easily, so put it aside on a regular basis. Check your ego at the door. The market’s bigger than we are, so if we argue with it long enough we’re going to lose! Keep those stop losses in place and give yourself the best possible chance to win this battle!

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Jeff White
President, The Stock Bandit, Inc.

[tags]Stocks, Investing, Stock Trading, Trading, Stop Loss[/tags]

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  1. As an option trader, I always needto find a breakout moment, once inthetrade, thefirst thing I do is set up for a quick exit. If the trade moves well I set up a stop loss and one that moves, as the trade moves.

  2. Hey Mike, trailing stops are a great feature for traders to use, thanks for your comment and come back often!


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