Stop losses are important, but as you gain experience they can become a hinderance. Some people have issues with them as they seem to work very well (meaning you will get taken out of a good position). Some traders explain that their stops are hit just before the trade turns and goes into what would have been a profitable trade. I will give you some solid advice not only on stop losses but risk management as a whole.
What is a Stop Loss? A Stop Loss is an order to buy/sell a stock or asset once a price has been reached in order to prevent massive losses on a trade. They can be your friend, and your enemy! To be honest I do not use a stop loss unless I have already suffered a loss on a trade and will not accept another significant loss on a position (typically my last trade of the day).
My typical risk management strategy is to flatten my position with HOTKEYS. Some of the benefits to flattening your position instead of using an actual Stop Loss order, is that you are not adding downside liquidity to your trade. This essentially means that you may be showing price action where to go to fill orders! Any limit order provides market liquidity. Another benefit to flattening your position instead of a stop loss is that it gives you, the trader, overall control of the trade. The downside to flattening out instead of a Stop Order is that it requires the discipline to know when to cut the trade! Hesitating or holding too long could create unnecessary losses.
What are the benefits of placing a Stop Loss? The first and best reason to use a stop is to prevent massive loss of capital. This is a big one for beginner traders because you will unfortunately be much more capable of making mistakes, Costly Mistakes!! One of the worst mistakes is not allowing the position to close with a loss. Many traders struggle with this as they believe the trade will turn back around……….NEVER TELL YOURSELF THIS!! Even if you have seen stocks turn back around, this doesn’t always happen and could really create significant losses.
A psychological benefit to placing a Stop loss order is the ease of stress! In the cases that I have used a stop loss order, I don’t feel as on the edge of my seat. This is a real benefit as it will allow you to think clearly.
One of the biggest keys to successful risk management is actually where you enter the position! If you are trading based off of momentum day trading strategies, most times the trades work out in your favor pretty quickly if the entry was solid! When I flatten out of a position on a loss I flatten much quicker than I do on the profit side! This is because after trading for a long time I know that if the trade goes against me on a solid entry than the trade was not going to work out.
My HOTKEYS for flattening a position on Think Or Swim is ALT +F.
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