November 14, 2007 at 7:05 am | | Comments 6

Safety Nets for Trading

All of us could use a safety net from time to time, and fortunately every single one of us has access to one! It’s called the stop loss, and it’s an invaluable part of any trading strategy.

Regardless of trading style, we all know that there will be occasions when we’ll be wrong and lose money. Knowing that if we play the trading game it’s unavoidable, the next best thing to do then is to limit those losses the best way we know how and protect the downside. That may involve setting an initial stop loss level on a new trade, or it may involve tightening up stops on existing trades, but either way it’s important to have these safety nets in place.

Last week’s steep selloff caught many by surprise, bringing untold levels of pain to those who failed to employ a stop loss order. It’s an excellent reminder that truly anything is possible in the market at any time.

But you’re different, right?

Think of it this way…. an experienced driver still wears his seatbelt, a great climber still uses a safety harness, and any trader worth his salt will employ the stop loss as a safety net. Doing so will prevent the kind of long-term damage that hope can do to a trading account when positioned on the wrong side of the market.

Setting stops appropriately is an art which requires constant monitoring and modification. Even if you’re not a very experienced trader and may not even know the proper areas to place your stops, do not forget that having some kind of stop in place is better than nothing at all. Don’t walk the high wire without some protection! Your trading capital is your lifeblood as a trader, and it deserves your protection. Play great defense and you’ll have plenty of opportunities to put your offense to work!

The idea is to keep moving forward.

Last Thursday and Friday I was stopped out of 2 positions, one for a gain and one for a loss. However, obeying those stops saved me from further losses which I’d be sitting on had I merely ignored them or hoped for a recovery. That prevented further pain, and although taking those stops was no fun at the time, I was still very glad to have done so by the end of the week. After all, I’d rather be sent to the sidelines with a few paper cuts than be carted off the field on a stretcher with a broken leg (or worse). Don’t become a stuckholder – babysitting underperforming positions is no fun!

There will be plenty of times when we’ll be wrong as traders, so accept that fact as part of the game. As soon as you can do that, you’ll ensure your longevity as a trader, and vastly improve your odds of great success.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

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  1. Do you use parabolic stops or another method?

  2. I actually just let the charts dictate when to get out. Parabolic stops I am not familiar with…I exit when the pattern I’m trading is no longer valid.


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