Setting a stop loss to define your risk on every trade you take should be a no-brainer, but apparently it’s not. Many people, still, are content to trade the markets without a stop loss. Many more, while using a stop loss are happy to move it to keep the trade alive, which is almost as bad.
It is (kind of) understable. Nothing gets your heart racing like a little bit of price movement. And then when price comes back, and then starts going against you, well, your ego gets involved and you have trouble admitting you were wrong to put on the trade.
Still, it is about as stupid it gets to not trade with a stop loss capping your risk. Steve Burns outlines this nicely in his “10 Reasons” article below.
Here are ten reasons a stop loss is so important in trading: A stop loss defines your price risk by quantifying what price level you will exit a trade at. A stop loss helps define your trade size. By knowing what price you are going to exit a losing trade you can set your position Why A Stop Loss Is Important In Trading
image courtesy of newtraderu.com
There’s actually a lot tied up in the setting of stop losses. Not least of which is position size. I know myself when starting out, position size was too big, but also the stop loss I set was a static number of pips.
Nowadays its very different. With the ego in check and the viability of the trade being front and center, my stop loss is where it has to be for the trade to have a chance of succeeding, and my risk is adapted to that.
Stop loss and position sizing go hand in hand; both to cap you risk to what you have determined in your trading plan and to give the trade the best chance of being a winner based on the way the market is behaving right in front of you right now.
Both setting stop losses and position sizing a key factors to becoming a consistently profitable trader.