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The Journey Of A New Trader: Managing The Stops

When you are trading it is important to have an exit strategy as part of your trading strategy. Many people allow their stops to run in hopes making a profit instead of exiting on a small loss and trying to enter in a possible opposite directional market. Rather exit on a small loss and look for the next trade because often you will lose more than you win.

 

To beat this, you must take your losses and trail your profits. Trailing profits however means that you would be looking for trend and trading it in either direction, obviously in conjunction with your own strategies. People don’t trail profits because they are afraid of losing profits and allow stops to run because of fear of missing profits – essentially they have trouble accepting that the trade they entered was a bad trade and that they need to stop out, stopping out means accepting that the trade was bad and it is that acceptance that people struggle with. So they hold onto that draw-down and they let the stop run in hopes that they market will turn around so they can still gain a bit of profit. Why lose more money in hopes of position turning into a winning trade when clearly you are in a losing trade? If you trail your stop on a winning trade your stop will be in such a position that when the market changes direction it will hit your stop while the trade is still positive. You can argue that you end up missing out on a few points however, what is actually happening, where you would have taken profit at say 100 points you allow the trade to hypothetically hit 400 points.  

 

My idea is that it is better to trail winning trades than it is to extend your stop loss. This creates a better opportunity to make one win that covers maybe 3 losses and you end in a profit. There are moments in the market where it climbs and drops for an extended period. If you can follow it with your stop loss, you could avoid early exits, reduce your risk of loss, as well as combat greed and fear.

 

The concept is easy. Enter a trade if you know the risk is small and the market has turned from previous trend, and as the market moves, rather than exit because you notice the profit increasing and you are afraid of losing it, you can move your stop loss from beneath entry to above entry and follow the trend until the market stops you out. The nice thing is that it stops you out at a profit. Learn to manage your losses so that you can make back what you lost in a single trade. Learn to hold winners more often than holding losers in hopes of a winner. Stay focused on the market and keep your emotions in check.

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