Master the counter intuitive notion of the trading stop goes hand in hand with turning a profit. Fail with one and you’re bound to fail with the other as well.

Whether you’ve experienced it yet or not, all traders at some point make the mistake of holding on too long. The important thing to remember is, even the biggest loss starts out as a small loss and I think we’d all agree that small losses are better than big losses. The trick is, by placing initial stops, we are able to catch a loss before it starts spiraling out of control. As any experienced trader will attest to, the bigger a loss gets, the more challenging it becomes to apply a trade stop.

Basically, a trading stop is a predetermined exit point. When a specific trade fails to perform has you’d anticipated, a trading stop is the point at which you pull out of the trade. Remember, trading is vulnerable to various trends and we can never be 100% certain as to when a trend will change. For all you know, you may enter into a trade just as the trend is about to change, thus the need for a predefined exit point. In other words, if the price drops below a predetermined limit, you exit.

The ability to make decisions which counter intuitive is essential if you’re hoping to be a successful trader because it’s generally in out nature to hold on too long when a trade is slipping.

As Richard Harding once described it, an initial stop is like a red traffic light. While you could of course ignore it, you’d certainly be asking for trouble if you did.

So, just how wide should you set your trade stop? This is a common question, particularly between traders new to the idea of a trading stop, but unfortunately it’s a question which cannot be answered accurately. The reason being, the amount of room you allow for price movement will depend largely on the time frame being traded.

For the most part, traders who focus on short term trading tend to set their initial stop close to the price while traders involved with longer term trading tend to allow more room for movement. The important thing is, once you’ve identified the time frame of your trade, you need to ignore any movements which are considered normal with that particular time frame. The last thing you want to do is end up closing out simply because of some normal trading fluctuation. Remember, a certain amount of movement is normal and is to be expected.

When a trader sets an initial stop just below the original trade entry price it’s known as a tight stop. The downside of a tight stop is that it can bring about a premature exit when a small drop occurs. Essentially, this could see you leave a trade even before the market has had any time to recover. The opposite applies to a loose trade which has been set to allow for more movement. While a loose stop does carry some risk of a bigger loss, it also allows some time for trade prices to recover.

Essentially, tight trading stops should be avoided if at all possible. Firstly, they could well result in you being closed out prematurely on a regular basis, thus making your trade system unreliable. Secondly, they increase overall transaction costs significantly. Traders with a small float in particular, should avoid tight stops simply because of the astronomical brokerage which is almost inevitable.

Essentially, this is perhaps the main reason why I advise clients to go for a trading system over a slightly longer time frame. The stops on short term systems just tend to be too tight in the vast majority of cases.

Find Out About The Stock Trading Systems You Dream About! Learn how by visiting www.trading-secrets-revealed.com.

categories: trading stop, trade entry, trading, finance

Related posts:

1. Stop Loss Orders One important way to control your trading risk is by...
2. Stop Loss Rules Explained You need to lean how to position your stop loss...
3. Putting Stop Loss When adjusting your stops due to an increase in trade...
4. Trading Secrets – Stop Losses There are a couple of cardinal successful stock market trading...
5. Don’t Trade Without A Stop Loss The market goes in one direction. It has a correction....

Related posts brought to you by Yet Another Related Posts Plugin.