TRAILING STOPS LOSS

TRAILING STOPS LOSS

 

In the previous paragraphs, I have been mainly talking about stops when a trade moves against you. The next kind of stop relates to when the stock is moving in your direction. This is called the trailing stop. The trailing stop again can be mental or auto depending on both the methodology behind the trade as well as your reasonable ability to execute the exit. Trailing stops simply refer to moving the stop price in the direction that the stock is moving to lock in better profits.

For example, if I bought a stock at 40 and it was trading at 41, I may want to trail my stop higher to 40.50 in case it pulled back. This way I won’t give up more than a Now that we’ve gone over a few of the ideas and mechanics of stops, we need to discuss the psychology behind why stops are so hard to keep
for newer traders and, in some cases, experienced traders as well. I have seen so many traders in my own room and heard about many others that have ended their careers because of that one stock that “had to come back” but never did. Eventually, the pain of loss became so great or worse, yet a margin call came, and they had to quit trading before they ever had a chance to see if they really had the abilities to become good traders.

 It is said that 70-percent of day traders fail. A percentage of this failure rate is due to the inability to keep a tight stop loss. It only takes one bad trade to wipe out a portfolio. Don’t let this happen to you. half-point in profits. If it climbed to 42, I again may trail my stop to 41.50. Eventually, one of two things will happen. Either my beliefs will change about the value of the stock, that it is too high, and 

I will sell the stock at this price level or the stock will pullback on its own profit-taking and hit my trailed stop. Either one of these scenarios enables me to lock in better profits as the stock moves in my direction while taking reasonable profits along the way. Obviously, if I bought the stock at 40 and it fell below that price or whatever my stop price was, then I would execute the stop loss instead of initiating a trailing stop. This is clear since the stock no longer exhibited a performance consistent with my beliefs, so I would exit the trade with a small loss.

beliefs, so I would exit the trade with a small loss. Now that we’ve gone over a few of the ideas and mechanics of stops, we need to discuss the psychology behind why stops are so hard to keep for newer traders and, in some cases, experienced traders as well. I have seen so many traders in my own room and heard about many others that have ended their careers because of that one stock that “had to come back” but never did. Eventually, the pain of loss became so great or worse, yet a margin call came, and they had to quit trading before they ever had a chance to see if they really had the abilities to become good traders. It is said that 70-percent of day traders fail. A percentage of this failure rate is due to the inability to keep a tight stop loss. It only take some bad trade to wipe out a portfolio. Don’t let this happen to you.

A stop loss should never be seen as a negative thing as long as it is taken in the right steps of the trading process. As long as the stop price is determined and executed, the stop loss can be taken to ensure that you could come and trade another day. If the stop loss is more than desired because the previous stop price was overlooked or missed and not executed, then this is a personal flaw more often than not. Although I say that stops are the sole responsibility of the trader, I understand that at some points in time they are out of control of the individual. In these cases, we may have a technological glitch that removes our connection
to the markets and by the time either a broker is contacted or the connection is restored, the trade has moved past your stop price. Although I understand this can happen, and it has happened to me, this is not a part of the stop loss process that we must focus on.

Going beyond the technological problem of not being able to keep a small stop loss is the emotional part. Many newer traders tend to view a loss as a negative impact on their trading portfolio or take it person ally as a negative reflection on their ability to trade. Many traders seem to believe that lost money is lost self-worth. This couldn’t be further from the truth. A small stop loss taken is a sign of a disciplined trading program that one adheres to. It both instills confidence in your trading ability from an execution standpoint and enhances your reasoning for trading. When one goes back through one’s trading journals and sees how much money is lost due to wider than desired stop losses, he or she will be amazed by the difference.

The other side of the issue is that many will key on those trades that came out as profitable simply by holding the stock and letting it come back to profitability. Again, this may work for you 9 times out of 10, but if the tenth time does not work out, you stand the chance to lose the prof- its from the previous nine times. Also, a strict stop loss regiment employed in this fashion will begin to tell you about your entry and exit points relative to timing and execution ability. This simply means that if you are taking numerous small stop losses while not providing enough gains, you are doing one of a couple things.


You are either not entering close enough to the best price for the reversal or trade direction (chasing) or you are simply trading a plan that is not working for you. Taking 100 stops and losing $5,000 versus taking one blown stop and losing $5,000 will enable you to better assess your trading plan with more practice and experience under your trading guidelines. One trade won’t allow you to know whether this trading plan is working or not. Trading more actively and assessing the win/loss and profit/loss ratio on this idea will give you a sense of how effective the plan is. Again, realize this is a momentum trader’s plan and not an investor’s plan, where one or two trades a year may be normal.


ermined stop loss is a function of a trading plan, then they begin to see stop losses as a positive. This shift of psychology within a trader will ultimately help them to either achieve success or come to the realization that this method simply is not working for them. Acceptance of a small loss comes from a lot of personal change in many traders. Ego in a trader can play a huge role in not coming to this acceptance right away. Many traders feel that the reason they are in the trade is because they are right, and the market and everyone else is wrong. Therefore, they will cling to the issue until bankruptcy to prove themselves right. Unfortunately, you can see the detriment that this serves to traders. Getting rid of one’s ego and stubbornness to prevent holding a losing trade and cut the losses immediately is a big step toward understanding stop loss executions. I simply look at a stop loss as a way to protect my capital from larger losses.


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