Thursday, 14 July 2011

Stops Can Be Damaging To Your Wealth & Happy Bastille Day

Today is Bastille Day and we had a great fireworks display in the valley right in front of our living room. It was spectacular. Happy holiday to all of our French friends.

One of the most significant blocks to CP are the incorrect placement of stop losses. I've written about this before and I can't write about it often enough.

My stop losses are placed at a point where I know that the trade is wrong. This is a critical part of both my profitability and win rate. I identify where the stop must be prior to entering the trade. The level of the stop impacts my position size. I try and keep my risk per trade uniform so position sizing plays an important part.

If the amount of the stop loss is too large, I pass on the trade.

Where or when should stops be placed?

The "where and when" is when the picture no longer supports the trade. Examples of this can be a change in the trend of the chart you are trading or a break of a significant support, and so on. Just because the market pulls back more than I thought it would is not a reason to stop myself out. It's an opportunity to double down on my position, near to where I would stop myself out, giving me an almost free trade. 

The stop on the trade below was the significant low fractal. I would have wanted to see orderflow reverse there.

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