A stop loss is a risk management tool that keeps your losing trades small. The point of a stop loss is defensive and to eliminate big losses from your trading.
Here are ten tips for thinking about when placing a stop loss on a trade:
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Your stop loss should be a part of your trading plan on entry not figured out later.
The best time to set a stop loss is before you get emotionally wrapped up in the outcome of a losing trade.
A stop loss should be placed at a price level that price shouldn’t go to if the trade is going to work out in your favor.
A stop loss should be placed at a key technical level not based on an opinion.
It is better to set a stop loss based on a meaningful price level not just at a flat percentage of loss from entry.
A stop loss should be set first then position sized based on the size loss you want if it is hit.
Set your stop at a level that has a low probability of being triggered to increase your odds of success.
The best stop loss is taken when first triggered not holding and hoping, if you don’t follow your plan then you aren’t really managing risk or staying disciplined.
The longer you wait to stop your loss the harder it is to eventually exit later.
The farther your stop loss is from your entry price the smaller your position size should be.
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Higher highs & higher lows define the market is in an uptrend. Lower highs and lower lows define the market is in a downtrend. Trading inside a defined price range a sideways market. Defining what type of market you are in helps you go in the direction of least resistance.
Where price is in relation to the moving average in its time frame can show the current trend.
Research historical chart patterns to understand what is possible in the market and how markets change from uptrends to downtrends, and from volatile to range bound. Use this insight to structure profitable trading systems using price action signals.
Backtest your trading signals to see if they had an edge in the past.
Don’t do things half-way. Only do things that you are passionate about. If you can’t do something with all of your heart, then continue to look for your true calling. Then do it to the best of your ability.
Know where you are going. If you don’t know where you are going, your decisions & destinations will be a result of your environment. Goals take time, perseverance, & effort. Most people never accomplish anything because they quit too early, don’t work hard enough, & don’t finish.
Traders must have the perseverance to stick to trading until they are successful. Some of the best traders are ones that had the strength to push through the pain, learn from their mistakes, & keep at it until they made it. All profitable traders had to survive the learning curve
Great traders cut losing trades short. The ability to accept that you are wrong and put your ego aside is the key to professional success. Setting stops is one of the top skills for a trader to learn. They need to keep losses small but give room for a profitable trade to play out
Trading will educate you about yourself. You will learn your strengths and weaknesses.
Learning to trade well will make you a better person. Good traders do well managing their ego, fear, and greed. Also risk management will help in other areas of your life.