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In trading, when the market throws us a curve ball, we tend to focus a lot more on where we expect the market to go and give enough thought to what to do. To be realistic about it, it’s a common practice among traders: treating stop losses almost as an afterthought.
At some point, however, the market is going to go against you; and as previously pointed out, the trades that do not work more than finding the right combination of indicators are often what results in attrition to your account. If half of trading knows when to enter the market, the other half knows when to get out of the market.
Setting up stop losses is a bit of an art
Unfortunately, there is no scientific, foolproof way to determine ideally where the stop losses will be placed. A lot of what works best is personal to the trader; and it depends on a number of variables, including the style of trading, the philosophy of trading, the strategy itself, the psychology of the trader, and more.
Therefore, any advice you take when it comes to the placement of stop losses should not be seen as cast in stone and should be filtered through your personal trading experience and perspective.
Factors to keep in mind
A stop loss in its most basic form is simply a trigger to close your trade before the market goes too far in the wrong direction, so one of the significant factors you have to consider when placing a trade is what market conditions would tell you that you have received an erroneous signal from your strategy. Ideally, perhaps, As soon as you know for certain that your trade is not going to work out, you would like to be taken out of the market.
This leads to one of the trade offs of deciding where your stop loss is to be placed: the closer it is placed, the less loss you will have; on the other hand, it will be triggered more often, giving your trade less opportunity to recover.
The question that leads from there is: what kind of commercial philosophy do you have? Are you risk-averse, or do you see your stop loss as a last-ditch fail safe, and want to minimize your exposure.
Day trading v long term traders
Usually, by the end of the day, day traders close all their positions, so they have the option of watching the whole time their trade is open. This leads them to have a philosophy more focused on choosing their exit according to market circumstances and mostly using stop loss as a safety measure. Some will claim that a stop loss should not, ideally, be triggered at all, since you’ve cut your losses as soon as possible.
Long-term traders, on the other hand, won’t be able to watch their trade all the time. The stop loss is also a safety measure for them, but it is also often an integral part of their approach to minimise losses while they are away from the market. There is a calculation behind where their stop losses are positioned.
Keep in mind
One thing both can agree on, either way, is avoiding the temptation to move stop losses. Stop losses should be intentionally placed and should not be moved-although there are some limited times when market conditions and strategy can justify moving them, there is a psychological problem that leads many traders to move their stop loss instead of allowing the trade to stop. – Unnecessarily augmenting their losses. Instead of moving the stop loss later, when you place it initially, it is better to pay more attention, and in most instances, it is better to take the loss (and use it as an opportunity to figure out how to put the stop better the next time), than to move the stop loss. In the long term, you are better off being stopped in a predictable, consistent way than being stopped. try to avoid losing a few pips on this one trade.
Although many people do not like stop losses, because “loss” is in their name, because they are associated with loss, it is important to remember that they exist in order to keep you from losing money. Think of them as the bodyguards who protect the balance of your account, and you stick around to see what might happen if your bodyguard tells you it’s time to leave When you hire a bodyguard, you want to make sure you have made the right choice, and you want to make sure you make the right choice when you decide where to choose.to place your stop losses.
