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Taking a stop loss is never a pleasant part of trading and it never gets easier, no matter how long you trade the markets. At no time should taking a loss begin to feel good to a day trader, short term trader or investor and if it does, you better get into a different line of business, real quick. Losing money is in no way an enjoyable part of a day trader, short term trader or investors trading strategy.
However, controlling a stop loss should make any day trader, short term investor or investor feel good about themselves and their ability to control their trades. These disciplined traders maintain their ability to control their trading losses instead of their excessive trading losses controlling their ability to trade again due to trading capital being tied up in losing positions.
For the trader who fails to take a loss or simply refuses to take a loss, they then become an investor in a losing position, not by desire or choice, but because they got ‘stuck’ in a trade that they failed to take a stop loss on because they are hoping, the losing position will turn around.
If anyone reading this issue of our Monthly Trading Lesson, make trades in the financial markets based on hope, read no further because we cannot help you. There is no room for hope when you are trading the financial markets, period.
Individuals who are successful at day trading, short term investing and investing do so by developing trading strategies that cater to their own individual trading goals. Part of those successful trading strategies revolves around the ability to control the amount of losses they are willing to take, and know what those losses may be, even before they open a position in any Stock, Futures contract or Forex contract.
You should know what your stop loss will be before you place any trade. Stop losses can be based on any formula you the day trader, short term investor or investor feel comfortable with whether it be a percentage of the investment in the position, certain number of points or whatever the individual comes up with – you decide.
Stop losses will need adjusted depending upon number of shares or contracts traded, amount per share or contract of position taken or dependent upon the volatility of the individual position – you must decide, the decision is yours. The more shares or contracts traded, the tighter the stop loss. The larger the share or contract price and the fewer shares or contracts traded, the wider the stop loss. The more volatile a stock or contract, the fewer shares a trader should trade and the wider the stop loss. Each individual must determine their own risk tolerance and determine how much money they are willing to lose, on any given trade they make.
The successful trader will take stops. The successful trader will take their pre-determined stop loss. The successful trader will not refuse to take a stop loss resulting in their becoming an investor in a losing position. The successful trader will not refuse to take a stop loss because they are hoping the position will turn around.
You can be a successful trader but you must be willing to take your stop losses and not allow yourself to become ‘stuck’ in a losing position. You control your trades, you place your trades and you control your stops. Demo trade until you have developed a strong trading strategy and a strategy that includes you controlling your trades and, controlling your stop loss on every trade you place.
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