Stop Loss - Primary Tool For Successful Trading
December 20, 2012 at 9:38 PM (FB)(GLD)(AZMN)(GE)(SPY)
Stop Loss Order - The Primary Tool For Successful Trading
How many times have I heard - "I don't use a stop because it always gets hit".
Well, that's kind of the point. Not that it should always get hit, but that it does get hit every time your trade idea doesn't match up with the markets idea. Remember, the market can remain irrational far longer than most of us can remain solvent.
When I hear that statement my ears always perk up. In fact, anytime I hear the words Always or Never in relation to trading, I get tickled. Why? Trading is a lot of things, but it's rarely "always or never" anything. Think about this, if your Stop did get hit every time, on every trade (always), that means without realizing it, you've got a pretty good knack for knowing exactly where the market is headed next. If it "always" goes there, perhaps that should be your target and not your stop. When I challenge most folks with this, the "always" comes unraveled pretty quickly. Turns out, it doesn't always happen, just enough to make you feel wrong and feeling wrong is a very dangerous emotion.
Before we move on I just want to say this, "If you really do have a strategy where your stop "always" gets hit, I'll buy it from you and retire in 6 months."
The real reason most traders are reluctant to use a stop is the one I just mentioned. Nobody wants to be wrong, and as long as you're still in the trade, no matter how much it has gone against you, there's always the chance that you really were right, that it will come back, and that feels so much better.
Feeling right is almost as dangerous as feeling wrong. Feelings have no place in the world of trading. It's never about being right or wrong. It's about using a high probability setup without emotion. No matter how smooth you are, even if you're the most interesting man in the world, the market is going to disagree with your opinion 30-40% of the time. The sooner you accept that, the sooner you'll build a successful Emini Trading Business.
Every long term successful trader uses a Hard Stop Loss.
S&P500 Emini Futures Crash As Plan B Fails
The cute and the clever may defy gravity for awhile, it may even appear they can walk on water, but it only takes one trade that goes too far before coming back and you're out of business. Tonight we saw the S&P500 Emini Futures drop 44.75 points in 20 minutes. In just 1 minute price dropped from 1424.75 to 1391.25 or 33.5 points. If you're a 10 contract gambler (no stop), here's the math -
10 contracts X $50 per point X 44.75 points = $22,375.00
If you had $25k in your account, you'll live to gamble another day. If you only had $20k, you're done, finished, history, toast, kaput. What I'm trying to say is, you're out of business. Moves of this magnitude aren't a daily affair, however, it only takes one and you could be done.
The cheapest business insurance you will every buy is a hard stop, server side. Some day's the premium may pinch a bit, but the good news is, you'll still be in business tomorrow.
As opportunities unfold we'll keep you posted.
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