August 06, 2009 at 8:50 pm | | Comments 5

Stop Loss Placement, Part 4

As we complete this series on stop loss placement, we’re going to discuss trailing stops.  But be sure to catch Part 1, Part 2 and Part 3 first!

In this segment, I specifically want to discuss the importance of managing our risk throughout a trade, not only to reduce losses but also to preserve profits.  This is achieved by adjusting our stop, or through the use of a trailing stop.

When and Why to Adjust a Stop Loss

A rock climber knows the importance of anchoring himself to the wall along the way up, just in case he happens to slip.  The anchor set early in the climb at a low altitude is every bit as important as the ones set at higher levels, but the more a climber ascends, the less useful a low anchor will become.  As a result, it’s wise to keep raising it along the way.

Trading is similar in that the stop loss we initially set for a position may not be appropriate once that trade has progressed, so it’s likely to need adjusting along the way.

Setting some rules for ourselves, sticking with them consistently, and maintaining an adequate reward-to-risk structure throughout the trade can keep us in good shape.

Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

Update: Check out Part 1, Part 2 and Part 3 of this series!

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

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