Stop Loss Orders can be Dangerous to your Financial Wealth

Stop Loss orders placed in the market are a MUST to prevent disasters that can happen due to catastrophic news events, internet disconnection and similar things. They are NOT the tool for a discretionary trader to use to routinely exit from a losing trade unless you are a scalper.

One of the greatest causes of failure to reach CP is exiting from trades either too late or too early. If your trader profile is somewhat like mine or longer in length of time in trades then using a stop loss to exit is a cop out that could be costing you heaps.

I am a discretionary trader and I use my discretion to exit. I have a drop dead stop, way out of the way of possible price fluctuations within my trade's expectations (5.75 points for the ES, for example).

As soon as I have a trade triggered, my job is to monitor the trade at the close of each bar. The fact that I use range bars is a distinct advantage as much of the noise is eliminated and a new bar is created in line with the level of volatility.

My criteria for "stopping myself out" is not usually just price.

Support and resistance levels are not knife sharp. They are "around" a number so I need to monitor what is happening when I hit these levels. I can do this by watching the DOM, or better still, use the inside the bar information from MarketDelta to tell me what "they" are doing. Both the Volume Breakdown and Footprint info clue me in on whether I am seeing short covering and long liquidation, move in the balance within a bar from buying to selling or vice- versa. I can then make a more intelligent decision on whether to exit my position or not. Of course sometimes price just moves vertically through my level and I exit quickly due to the limits of price being exceeded. In other instances I have the opportunity to double down and make more money.

There is not much worse for me than to see traders exiting a trade because of a relatively small adverse price movement only to have to re-enter again at a more adverse price and finally having a winning trade but no profit due to the first unnecessary exit and the late re-entry. Doing your back testing and creating a proper trading plan eliminates a lot of these "bad beats" which are, in reality, self inflicted wounds.

Some of the new ELers from the training like the Euro FX (6E) and I do too.

Tomorrow I'll be starting a multi-part blog post on collecting and using trading statistics.