I am sure that anyone who calls themselves a trader has read plenty regarding stop losses. Even I have written more that one article on the topic. It stands to reason that this is a topic of discussion, because of one simple fact. Not taking stops is still the number one reason traders fail. Despite all of the articles on this topic, and all of the attention this topic commands, people still have issues with stop losses.
Maybe this will help. I recently have been asking traders that I am instructing a simple true-false question: On a typical day, if you ignore your stops, you will lose money due to not stopping out when you should have. True of false? After only a moment of thought, 99% of the traders asked, quickly belt out the answer that they think will please the teacher. "TRUE!" they yell, "Not taking stops are the number one reason traders fail!" As if they had just finished reading a book on the topic. Then they are often quite dismayed to hear the teacher say, no, the answer is false.
Why false? Simple. There are a great many times a trade stops by a small amount, only to come back later in the day and actually be a winner. This sets up a subconscious pattern to continue the behavior. It is known as "winning the wrong way", as described in the book "Tools and Tactics for the Master Day Trader". As a matter of fact, this actually happens more often than not for many traders, and you can find this out if you track your trades and research some of these things. It will vary greatly with your trading style, but I would estimate that the 'average' day trader may actually lose a little money on the typical day by taking stops as opposed to not taking them. So, why use stops then?
If you are confused right now, it is because you don't understand the rationale for using stops. Stops have one simple purpose, and those who have taken our Trading the Pristine Method Part One know this because the very first time they are introduced to a stop loss it is called the 'insurance policy'. It is not that missing one stop is a guaranteed disaster. The point is that if you make it a habit, you will get caught one day. Getting 'caught' may mean the end of your trading career. I cannot tell you how many times I got asked in the year 2001 a very similar question. Someone with BRCM, or a similar stock, which they bought at $250.00, wants to know if they should sell it now at $9.50. Did they buy it at $250.00 with a stop at $9.51? No. They bought a 'scalp' with a stop at $248.00. They just didn't take their stop, and got caught. This 'mistake' cost them their trading career, literally.
If you drive without auto insurance you may brag to your friends how you just saved $3,000.00 over recent years. Until you have an accident and get hit with the million dollar suit. Then your financial life is over. Bottom line, playing with stops is playing with your career. Manage them in a way that makes sense for you, but don't ever violate your plan and don't ever, ever, ever, carry a trade overnight that was not intended to be a swing just because you cannot bring yourself to sell the position.
Mouser57 of Penny Stocks and Stock Message Board
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