A stop is a predetermined number below our entry price whether we are long or short. Stops are their for our protection against losses when our program malfunctions.
Although not 100% accurate, there are some poor fills and slippage. The position has control over you, but you’re out there arguing and if you don’t have the stoppage in place, what do you do?
You’ve lost control, emotions are starting to set in, and you’ve walked down a path you didn’t want to be on. You walked into the zone wishing I wasn’t there. You start lying to yourself saying it will come back, it’s just temporary or better yet, I’ll buy more shares to make up for the loss, not realizing it might go down further. Of course, it just sucks up all the hard-earned money in a matter of days.
Now for the humble slice of pie. Stops should be placed with a money management plan, but first you need to determine how much you are willing to lose on any given trade. For example, let’s say I have $5,000 to trade today.
If I am Jumping Jack, a risky trader, and I use high leverage, trade multiple amounts of shares and multiple shares at the same time putting 40% of the total money which amounts to $2,000 at risk. Risky Rob chooses 20% of the total which amounts to $1000 at risk and Timid Tommy risks 10% of his total which amounts to $500 at any time.
Remember that this is a total of all positions combined if you are trading multiple stocks. If you are trading one, just figure out what price it is and what it translates to in terms of placing orders for your broker or what to plug into your trading platform which most of we are currently.
You need to examine yourself as to what risk tolerance category you fall into…that is, the level that will make you sleep at night and get on with your life, without stress or personality change.
People get in trouble when they trade too much and have too much leverage. Doing your homework to find out the current direction of the trend and determining your stop placement based on your tolerance for losing money should be part of your business plan. Remember that the trend is your friend until the end.
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