Stop Losses - Part 1
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Stop-loss placement is not the most exciting topic in the world of trading. However it is one of the most important. If you are unable to learn the art of stop-loss placement you will be on a very rough path as a trader.
-You should never place a stop-loss based on a strict percent or number. Price should have to breach a major level for your trade setup to be wrong.
-Always consider the target destination or target potential first before taking a trade entry, then focus on the invalidation and stop loss.
-Each stop loss should be risking what you are comfortable depending on the style of trading you do. If you are used to HTF trading or LTF trading stops may vary based on tight or wider stops.
-Tight Stops usually have lower probability, but higher rewards.
-Having a wide a stop usually takes time to play out. Make sure you aware of the risk/reward.
Stops are critical to managing risk. Once a trader finds the stop-loss placement, they are then able to determine their position size on the trade. This allows the trader to know ahead of time the cost and risks of the trade. Remember trading is a business and a stop-loss is just the cost and risk of performing your operation. They are there to force you to get out of the trade if you make a mistake despite whatever emotional bias you may have towards staying in a trade. Hanging on to a loser leads to account ruin, do not allow this to happen. If you find yourself getting constantly stopped out and then price going in your anticipated direction there are two reasons for this.
*You had a terrible entry resulting in a tighter stop loss.
*You got scared and moved it.
Knowing when to trail stops and protect profits is part of the art. In part 2 we will discuss examples and you will learn more ways to master this crucial element of trading.
Authored and Charted by WildWestTrades.