Stops are a very important component to trading. In my opinion, the most destructive mistake when trading is NOT placing a stop. In this article, we will review types of stops, placement techniques, and at the conclusion, you will understand how to implement stops no matter your trading style. Not only will we cover the basics, but we may be able to troubleshoot existing trader’s issues with stops. If you are being stopped out too frequently, you might want to keep reading.
Stop orders do not necessarily limit your loss to the stop price because stop orders, if the price is hit, become market orders and, depending on market conditions, the actual fill price can be different from the stop price. If a market reached its daily price fluctuation limit, a “limit move”, it may be possible to execute a stop loss order. Continue reading "Stops That Make Sense"→
This is the final portion of the Trader's Toolbox: Money Management series. This post will recap the 5 main rules discussed. If you missed our previous post please click here for : Part 1, Part 2 or Part 3.
♦ Setting a goal - Decide what your trading objective is (quick profit and steady return) as well as your risk tolerance level
♦Diversification - If possible, allocate your finances between different products to avert the danger of getting wiped out in a single market. Don't go overboard, though; think in terms of three to five unrelated instruments. Stick to markets you know, rather than risking the unknown for the sake of diversification.
♦Deciding how much money to risk - The total amount you risk at a given time in a particular market group or on a particular trade should be based on a a percentage of your total trading equity. Exceeding your allocation parameters can result in overexposure.
♦Use of stop orders - The name of the game is preservation of capital. Placing conservative stops to cut your losses will ensure you are around to trade another day. Stick to the limits determined by your equity allocation percentages.