Many gurus and authors of trading books never stop advocating the importance of placing a stop. In definition, stops (aka stoploss) is a measurement of risk you are willing to expose to the market. Nevertheless the market has never been merciful in taking out your stops in the most unexpected ways.
When I found about the professionals and their stop hunts, I felt a strong desire to compile a list to ensure you’re not falling for the common pitfalls that await you.
Guest post by David Aw of TradeForex4Freedom
This method is simply too common and if you are doing this, I bet a couple of dozens are in the same level as you. You see the market makers are in the market too long and are not blind. They just look at the chart and they immediately know where the stops would be place. Without remorse they give the market a push and take out your stops effortlessly thereby creating a false breakout.
2. Trading Ranges Are Killers For Stops
Avoid placing limit orders at common levels without first experiencing some false breakouts. They are a prelude to a real reversal, so it is still better to place stops as you never know when they will come. A better alternative is trading the pullback after price breaks above or below levels of support and resistance in a gradual form. Prepare to take sides when you see a long candlestick breaking out in frenzy.
3. Placing Stops At Obvious Levels
Placing stops at levels where everyone is doing it is a situation bound to get hit. You are better initiating the loss to minimize a further casualty to your account and trade again if the same signal triggers. I don’t recommend this to new traders but you can try to increase your risk tolerance by placing your stoploss a bit further to avoid getting hunted. Either way, avoid placing stops where you expect the price to fall is never an easy task.
4. Brokers Do Not Promise an Exact Stop Level
Yes you heard me: my experience with them was not pleasant as they claim that during times of high volatility they have the right not to deliver exact price levels. Remember before you were given an account with your broker, you had to read through a long list of terms and conditions? Well if you decide to scan through, do look out for the non-guarantee price part. It sure sours the heart. Nonetheless, it is best to curb such a possibility with money management.
5. Mental Stops Are Only For the Pros
After getting hit by several false breakouts most traders tend to give up using stops and switch to visual stops. Having an exit level memorized while watching the market reverses on your position is a stunt not for the faint hearted. Trying to get the best price out of a fast market is a fantasy many traders only dream about. Both require lots of experience and heart of stone. So, stay away and place actual stops.
6. Stops Are Cardinal To Your Success And Survival
Ok, maybe the point was too exaggerated but if you, as a trader do not use stops and the market, does trend, you might just be on your way to blow up your account. The marketscan trend for months or for a whole year but in today’s context that has been reduced to just a few weeks. Even so, you could get away with not placing stops for a while but if you are going to take trading as a career, the market will eventually give you the lesson you neglect so much.
7. Stops Impose Our Attention On Losses
Trading is a business itself and like with business, there is a cost. Many new traders tend to forget about the costs and narrow their vision on taking profits. Driving this way on the road while ignoring the rear view mirror is a recipe for a disaster waiting to happen.
8. Stops Are A One Way Street
The professionals spent as much time planning for their exits as they do figure out where to take profits. What stands out from them to new traders is how they move their stop loss. Apart from acknowledging that they are wrong if their stops are triggered, they only move their stop loss to protect their initial risk appetite. If the market was kind enough they would move more to collect a profit but never give it more room to prove themselves right.
9. Stops Keep You Grounded
Making an effort to know your profit target and placing the stops allow you to plan your risk to reward ratio. It also frees up any commitment as your emotions tend to create a bias when you money is tied to a trade. Trading without stops is like balancing a high wire act. You might get lucky in calm weather but it takes one fall to cripple your future.
10. Stops Ensure You Trade for Profits
New traders daydream about the profits they could make and begin searching for the best entries. Little do they know when they took upon a life as a trader the only salary they will have will be delivered only upon an exit. Be it for profits or loss you have to ensure your exits are planned in such a way that the reward outweigh the risk. Understand that giving a potential setup a miss when the rewards are little is just as important as rejecting a drink when you know you have to drive the drunks back home.
No matter what you heard about stoploss points or placing them, the point is the act of identifying where you exit a trade is a tough nut to crack. It is as comparable to finding a good trade. Before you put on a trade, take some time, plan your stoploss to ensure your capital is adequate to take the risk but far enough to stay out of the whipsaws that always plague the market.
That’s all from me today, I hope you’ve learned a thing or two, and can stop making the mistakes that so many other people are making. It will give you the edge.
David is an aspiring forex trader with a particular interest in personal development and how it relates to trading successfully. He runs TradeForex4Freedom a blog that educates you about following the trails of the smart money and how to profit from it.Get the 5 most predictable currency pairs