Let’s continue with the stock market trading skills and traits to win the game. Now we will discuss the most important and must have skills for trading that is using right stop loss and adjusting the position size in trading.
Using Right Stop Loss:
This is the step where even most experienced traders fall short in implementation.Using right stop loss is simply just putting a full stop to a painful story. So stop loss are helpful to traders for reducing their pain in trading.
Why Using Right Stop Loss Is So Important?
Often people get emotional with one trade and particularly when they think that this trade is 100% right. And the price goes the opposite. They don’t want to accept their mistake because it hurts their ego. They hope that price will turn around and they will get out with break-even to prove that it was not a losing trade, but this happens less often. Mostly they found themselves in quite big losing position. They not only lose a big portion of their trading capital but also time and other obvious trading opportunities. Now they lose confidence in their trading plan. Then they trade haphazardly without any trading plan. So they ultimately turn a small mistake into the disaster. So think how much important is using a right stop loss.
When To Decide Stop Loss?
You should decide your stop loss point well before you enter any trade because at that time your mind will be free from any emotion and trading stress so you will be able to take the right decision.
People get so excited when they find any trading opportunity, they even can’t think of using right stop loss. They just get busy calculating their profits. When ever you find yourself in such state of mind tell yourself that this is the right time to find a proper point of stop loss.
What Is Right Stop Loss Level?
I can write a book on the subject of where to place a stop loss. But for now I just tell you three important points listed below:
- First, it should be in line with your trading plan means it should be less than or around the maximum risk per trade that you fixed in your trading plan. Your maximum risk per trade should be less than 3% of your trading capital.
- The stop loss should be technically logical, means it should be at the place where you think your analysis to be completely wrong.
- Stop loss should be some point away from important support or resistance level. So they can’t be easily eaten up.
How To Execute Stop Loss When Hit?
There are numbers of ways you can use stop loss. Keep a mental stop loss and execute it as soon as the price hit there. Because in intraday trading stop loss orders are often eaten up. You can also mark a stop loss line in your chart and execute when the price hit there. You can also put an order to execute a stop loss order so it got executed automatically if you cannot watch market constantly.
The priority of stop loss should be highest. Means it should be above all analysis, technical, indicators or any trading strategy, and executed without any delay irrespective of other factors. Whenever I had bypassed my stop loss, I lost more. I have never made a profit after bypassing a stop loss, not even in a single trade. This is my personal experience. Because the stop loss was just right technically.
Sometimes people get trapped in so-called perfect trade. They find everything is just right for the trade. So they try to make a killing out of this trade. They love their analysis so much that they can’t think it can be wrong.
When at first when the price responds in the wrong direction. They think this is an opportunity to increase their position and double the profit in that trade. The price again goes in the opposite direction, now they think the price is overbought or oversold so it must reverse. So they again decide to add to the position so they can benefit from the expected reversal. And they blindly keep on adding to a losing position. And finally the trade results in a disaster.
The market is very cruel. Don’t expect that it will forgive your mistakes. Market is the worst kind of teacher, it punish you first and then teach you a lesson.
And the lesson is “Don’t try to make a killing out of one trade, only expected consistent return on your capital”
The above figure describes how we can add to the position at points E1, E2 and E3. Here we can add to the position because we are already in profit. Hence we are already right in our analysis. We add to a position when price corrects from the high point, pass some time and break some level.
Only add to a profitable position when price halts for some time and then break some important resistance or support level. This way you will only be multiplying your profit on good trades.
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For more on trading discipline and attitude click here.
You can also watch the following video presentation: