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Guest Commentary: Top 10 Scary Facts About Placing Stops

Guest Commentary: Top 10 Scary Facts About Placing Stops

2012-10-20 23:30:00
David Aw, TradeForex4Freedom,
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Many gurus and authors of trading books have and never stop advocating the importance of placing a stop. In definition, stops aka stop loss is a measurement of risk you are willing to expose part if not most of your trading capital to the market. Nevertheless the market has never been merciful in taking out your stops in the most unexpected ways and levels.

When I found about the professionals aka market makers and their stop hunts, I felt a strong desire to compile a list to ensure you’re not falling for the common pitfalls that await you.

1. Placing Stops Near Recent Visited Level

“Yikes! The market hit my stop loss and bounced back into my intended direction. What bad luck!?”

This method is simply too common and if you are doing this I bet a couple of dozens are in the same level as you. You see the market makers are in the market too long and isn’t blind. They just look at the chart and immediately they knew where the stops would be place. Without remorse they give the market a push and took out your stops effortlessly thereby creating a false breakout.

2. Trading Ranges Are Buffet for Stops

Avoid placing limit order at common levels without first experiencing some false breakouts. They are a prelude to a real reversal so still it is better to place stops as you never know when they will come. A better alternative is trading the pullback after price breaks above or below levels of support or resistance in gradual form. Prepare to take side when you see a long candlestick breaking out in frenzy.

3. Placing Stops at Obvious Levels

Placing stops at levels where everyone are doing it is a situation bound to get hit. You are better initiating the loss to minimize further casualty to your account and trade again if the same signal triggers. I don’t recommend this to new traders but you can try increase your risk tolerance by placing your stop loss a bit further to avoid getting hunted, either way avoid placing stops where you expect price to fall is never an easy task.

4. Brokers Do Not Promise Exact Stop Level

Yes you heard me; my experience with them as you say was not pleasant as they claim that during times of high volatility they have the right not to deliver exact price levels. Remember before you were given an account with your broker, you had to read through a long list of terms and conditions? Well if you decide to scan through, do look out for the non-guarantee price part. It sure sours the heart. Nonetheless, it is best to curb such possibility with money management.

5. Mental Stops Are Only For the Pros

After getting hit by several false breakouts most traders tend to give up using stops and switch to visual stops. Having an exit level memorize while watching the market reverses on your position is a stunt not for the faint hearted. Trying to get the best price out of a fast market is a fantasy many traders only dream about. Both of which requires lots of experience and heart stone. So stay away and place actual stops.

6. Stops Are Cardinal to Your Success and Survival

Ok maybe the point across was too exaggerated but if you as a trader do not use stops and the market does trend, you might just be on your way to blow up your account. Market due to less exposure to retail traders can trend for months or yearlong but in today’s context that has been reduce to just a few weeks. Even so you could get away with not placing stops for a while but if you are going to take trading has a career, the market will eventually give you the lesson you neglect so much.

7. Stops Impose Our Attention on Losses

Trading is a business itself and with business there is operation cost to run it. Many new traders tend to forget about the cost aka losses and narrow their vision on taking profits. Driving this way on the road while ignoring the rear view mirror is a recipe for disaster waiting to happen.

8. Stops Are a One Way Street

The Professionals spent as much time planning for their exits as they do figure out where to take profits. What stands out from them to new traders is how they move their stop loss. Apart from acknowledging that they are wrong if their stops are triggered, they only move their stop loss to protect their initial risk appetite. If the market was kind enough they would move more to collect profit but never give it more room to prove themselves right.

9. Stops Keep You Grounded

Making an effort to know your profit target and placing the stops allows you to plan your risk to reward ratio. It also frees up any commitment as your emotion tends to create bias when you money is tied to a trade. Trading without stops is like balancing a high wire act. You might get lucky in a calm weather but you just need one fall to cripple your future.

10. Stops Ensure You Trade for Profits

New traders daydream about the profits they could make from searching for the best entries. Little do they know when they took upon the life as a trader the only salary they will have is when you exit. Be it for profits or loss you have to ensure your exits are plan in such a way that the rewards outweigh the risk. Understand that giving a potential setup a miss when the rewards are little is just as important rejecting a drink when you know you be driving the drunks back.

No matter what you heard about stop loss or placing them, the point is the act of identify where you are getting out of a trade is a tough nut to crack. It is as comparable to finding a good trade. Before you put on a trade, take some time, plan your stop loss to ensure your capital is adequate to take the risk but far enough to stay out of the whipsaw that always plague the market.

That’s all from me today, I hope you’ve learned a thing or two, and can stop making the mistakes that so many other people are making. It will give you the edge.

Trade well!

Further reading: 5 Most Predictable Currency Pairs – Q4 2012

By David Aw,TradeForex4Freedom

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

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