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Why a Stop Needs to be in Place on Every Trade

By Richard Krivo, Trading Instructor
31 August 2012 18:41 GMT

The difference between the entry and the protective stop is your risk and represents what you are willing to lose on the trade.

Too many new traders use what they call a “mental stop”.

They have a price level in mind where they would consider getting out if the market moves against them, but they do not enter it into the trading platform. Typically, when the market does move down to that price, instead of exiting, they “wait and see how the market will react”.

If the loss becomes larger, then they decide that they will exit when the market moves back to their original mental stop level. As the market continues to move against them, intentions about getting out turn to hope about the market coming back before they receive a margin call. Many times, it is that margin call that determines their exit, not their own analysis.

Sound familiar?

I hope not, but this happens more than it needs to in the world of currency trading. You can avoid this by simply placing a protective stop in the market at the time of your entry. This means you have identified and limited your loss to an amount that you have determined to be acceptable.

Always keep this mind: a losing trade does not mean that the trader doesn’t know how to trade.

Moreover, losing trades cannot be avoided by not using protective stops. Instead we should limit those losses with the use of a protective stop. This way we can make sure we have protected our account balance and still have enough funds to take advantage of the next trading opportunity.

We should judge our success by the results of a series of trades, not just one trade. Without identifying our risk and using a protective stop, we risk not having the funds to be around long enough to take advantage of a series of trading opportunities.

Bottom Line: Never trade without a stop in place.

---Written by Richard Krivo

To contact Richard, please email instructor@dailyfx.com . You can follow Richard on Twitter@RKrivoFX.

To be added to Richard’s distribution list, please send an email with the subject line “Notification”, to rkrivo@fxcm.com .

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31 August 2012 18:41 GMT