May 18: Secret Tips and Tricks That Only The Experts Know – How to Set Stop Losses

by Dave on May 18, 2006

Anytime that you enter a position, you are going into the Market blind. You don`t know what point of the trend you are entering in at. You might be entering into a stock just before the trend changes. To protect your trading float you need to set a stop loss. This needs to be done before you enter a trade, so that there is no room for error, or last minute indecision. A stop loss is simply a predefined point at which you exit the stock.

Effectively, it`s like drawing a line in the sand underneath the share price, saying, `If the share price falls below this line, then the stock hasn`t done what I thought it was going to do, and I`ll exit the position.` This allows you to cut your losses short, and guards against an all too human tendency to want to believe you must be right.

When 95 percent of traders enter into a position, they`re expecting to profit from the trade. If, however, the share price goes against them, they feel they need to justify why they bought the stock by holding onto it until it turns a profit. You might have heard the idea that all big losses once started as small losses. Well, while the share price continues to go in the wrong direction, those losses grow in lockstep. This is why you need to have a stop loss in place it`s like having an ejector seat that tells you when to abort the mission.

One of the most common question I`m asked when traders are introduced to a stop loss is `How wide should I set my stop?` Or in other words, how much room should I give the stock to move? There are no definitive answers to this question because it depends on what time frame you`re trading in. If you`re a shorter-term trader, you`re going to have a stop loss that`s set closer to the share price. If you`re a longer-term trader, you`ll give the share price a little bit more room to move and set your stop loss lower.

Once you`ve identified what time frame you`re looking at trading, you need to be able to remove the normal market noise in that particular time frame. You don`t want to have to close out of a position just because a share price moved a little bit due to its normal trading volatility.

In fact, there are some serious drawbacks to setting tight stops. First you`ll decrease the reliability of your system because you get stopped out more often. Second, and probably a little bit more importantly, you dramatically increase your transaction costs. When you`re trading transaction costs make up a major proportion of your business expenses.

To give yourself a fighting chance, you want to trade a system that doesn`t chew through excessive brokerage. This is one of the major reasons I steer my clients into trading systems that run over a slightly longer time frame. With the correct system in place, and your risk minimized, you are well positioned to maximize your trading profits.

This article has been extracted from David Jenyns` Trading Secrets Revealed Course. Unfortunately this course is currently sold out. To be notified if and when extra copies are released, please send us an email and we`ll let you know when you can purchase a copy of this highly recommended course. Click Here and send us an email. and be sure to mention you want to be on the `Trading Secrets Revealed Waiting List`.


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